China brokerages tighten client scrutiny to stem excessive risk

Chinese brokerages are tightening scrutiny on new accounts and stepping up reviews for margin financing, securities lending, and options trading as regulators move to curb overly risky bets following a sharp market pullback.

Several firms, including Citic Securities Co. and East Money Information Co. have recently raised compliance requirements for clients seeking leverage or derivatives trading, according to people familiar with the matter, who asked not to be identified discussing private matters. The two brokers didn’t respond to requests for comment.

The measures include more stringent checks on finances, trading experience and risk tolerance before approving access to margin financing or options accounts, the people said. At several brokerages, investors who opened fresh accounts in the past six months or have received frequent margin calls will be restricted from further borrowing.

The clampdown underscores Beijing’s growing caution over equity market leverage, where severe retail losses risk spilling over into broader financial and social instability. Authorities are focusing on highly leveraged trading, which can trigger forced liquidations and accelerate market declines.

“Excessive concentrations of leverage in certain segments have increased the risk of market instability,” said Wang Chen, a partner at XuFunds Investment Management Co. “While those risks appear to have eased, they have likely not been fully unwound and will remain a regulatory focus in the coming period.”

Retail investors flooded into Chinese stocks during this year’s rally, relying heavily on borrowed money to chase gains. But as market volatility spiked, an increasing number of mom-and-pop traders were forced out of their positions in late July, according to brokerage account managers.

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