Sinolink Securities has increased its margin deposit ratio for new financing contracts to 100% from 80%. This makes it the first Chinese broker to adjust requirements amidst the ongoing market upswing.
The decision comes as mutual funds also reduce new orders after recent large gains. Chinese stocks have surged over $1 trillion in value in the past month, with the Shanghai Composite hitting a decade high.
Market Performance and Economic Concerns
The CSI 300 index has risen by more than 20%. Despite these gains, weak economic data is causing some to approach the optimism with caution.
We are seeing the first major sign of institutional caution with Sinolink Securities raising its margin deposit ratio to 100%. This is a clear signal that at least one major broker believes the recent rally is overextended and fueled by too much leverage. The fact that mutual funds are also starting to limit new orders reinforces the view that the “easy money” phase of this surge may be ending.
The divergence between the market’s performance and the underlying economy is becoming too large to ignore. While the CSI 300 index has climbed over 20% in just a month, recent data for July 2025 showed that industrial production grew by only 3.5%, missing expectations. This disconnect suggests the rally is based more on sentiment than on solid fundamentals, increasing the risk of a sharp correction.
Risk Management Strategies
For us, this points to a coming increase in market volatility. The CBOE China ETF Volatility Index (VXFXI) has already ticked up 15% this past week, moving from its recent lows as traders begin to price in more risk. Therefore, now is the time to consider buying protection, such as purchasing put options on broad market ETFs like the iShares FTSE A50 China Index ETF.
This situation has strong echoes of what we saw leading up to the market correction back in mid-2015. That rally was also characterized by a rapid, leverage-driven ascent that became detached from economic reality before a significant pullback. We should use that historical precedent as a guide for managing risk in the current environment.
Given these signals, we should be looking at strategies that benefit from a market pullback or stall. Buying out-of-the-money puts on the CSI 300 index offers a cheap way to hedge long positions. Alternatively, initiating bear call spreads would allow us to profit from a sideways or downward move with defined risk.
