China’s new shadow margin lending does not face any of the usual margin trading restrictions and provides up to 5 times greater leverage; however, it creates an oversight problem for the CSRC.
Since 2011 some, commercial banks and trusts have created ‘umbrella trusts. Under an umbrella, trust accounts are sub-accounts held by smaller private equity funds which receive funds for trading. Therefore, the number of trades on margin is effectively limitless, creating a regulatory black hole.
This new form of margin lending is only made possible by HOMS and depends on the retail investor. Hangzhou Hundsun Technologies owns HOMS, and a Jack Ma subsidiary paid 3.3 billion yuan in April 2014 to become their largest and controlling shareholder that means without risking any of his own capital in the market, Jack Ma was in place early to benefit from the recent stock market rally.