(Yicai) Oct. 30 -- The balance of China’s margin financing and securities lending has plunged by CNY620 billion (USD93.1 billion) in the past four months, with the margin financing decline erasing all gains this year and returning to the same level as in September last year.

China’s margin financing and securities lending balance shrank to CNY2.41 trillion (USD361.9 billion) from CNY3.03 trillion in the four months ended Oct. 27, with the October drop reaching CNY164.4 billion, according to the latest data from Wind Information. On Oct. 27 alone, it fell by CNY16.4 billion (USD2.5 billion) from the previous day, marking the 13th consecutive trading day of declines.

The margin financing and securities lending balance started the year at CNY2.56 trillion and then rose to a peak of CNY3.03 trillion on June 25, but it remained above the CNY3 trillion threshold for only nine trading days. It has been declining since then, recording this year’s largest drop of more than CNY400 billion in July, Wind data also showed.

Margin trading allows investors to use the securities they own as collateral to buy more assets they would not be able to acquire without leverage. Securities lending occurs when financial institutions loan shares to other entities for a certain period for a fee, for the borrower to sell them on the open market and expect to repurchase them cheaper to make a profit before returning them to the lender.

This round of adjustment was mainly triggered by heavily held institutional stocks, which gradually spread to sectors with high financing exposure, according to a source from a brokerage firm.

The flow of leveraged funds has reversed, as the electronics and communications sectors, which ranked among the top for net financing purchases in the first half of the year, became the main sectors for net financing sales in the second half.

The electronics sector had the most leveraged funds in the six months ended June 30, with cumulative net financing purchases of CNY269.8 billion, according to data from Wind. The communications sector ranked second, with cumulative net financing purchases of CNY71.1 billion.

But as market concerns over returns on artificial intelligence investments grew, leveraged funds also began to pull back from technology-growth sectors linked to AI computing power, with electronics and communications among the most affected.

From July to Oct. 27, the electronics sector saw a net outflow of CNY211.7 billion from financing funds, CNY58 billion more than the net inflow in the first half, ranking first. The communications sector ranked second, with a net outflow of CNY76.4 billion from financing funds, exceeding its net inflow in the first half.

Despite the sharp drop, the overall risk in the margin financing and securities lending segment remains manageable because market participants have different cost bases and there is no risk of widespread forced liquidation, according to industry insiders.

Editor: Futura Costaglione