Margin debt surge across Asia raises fears of another leverage-driven crash

Surging margin debt across China, India, and Japan is raising fresh warnings of a leverage-driven market crisis in Asia, even as the fallout from South Korea's summer stock rout continues to ripple through the region. In a commentary published Monday, Manishi Raychaudhuri, founder and CEO of Emmer Capital Partners and former head of Asia-Pacific equity research at BNP Paribas Securities, argued that the conditions for another margin-fueled crash are quietly building across multiple markets.reuters+1

Korea's Cautionary Tale

The KOSPI collapsed 39% between June 22 and July 30 after millions of South Korean retail investors, swept up in AI euphoria, used broker loans to pile into tech stocks and single-stock leveraged exchange-traded funds. When concerns over the sustainability of AI capital spending sent tech shares tumbling in June, falling collateral values triggered margin calls across more than a million leveraged accounts. Forced liquidations followed, creating a self-reinforcing cascade that erased billions in market value. Samsung Electronics and SK Hynix ↘ 0.46% together accounted for nearly 31% of total KOSPI leverage and fell 43% and 55%, respectively, when the unwind hit.sedaily+1

Leverage Building Across the Region

The pattern of rising margin debt extends well beyond Korea. India's Margin Trading Facility book has ballooned from just over $1 billion at the end of 2020 to $16.3 billion as of August 31, according to data from the National Stock Exchange and the Bombay Stock Exchange BSE Ltd. China's Shanghai Stock Exchange margin balance has tripled to roughly $200 billion from $68 billion in early 2019, now sitting 8% above its previous peak in May 2015 — a level that preceded a 48% crash in the Shanghai Composite Index. Japan's margin loan balance has nearly doubled to over $35 billion from $18 billion in early 2020.reuters+1

China's margin-to-market-cap ratio of 2% is the highest among major Asian markets and dwarfs the 0.6% ratio that proved destructive in South Korea. In India, 55% of margin loans sit in small- and mid-cap stocks, meaning forced selling could cascade into larger, more liquid names as investors scramble for cash.sedaily+1

Regulators Move, but Risks Persist

Regulators across the region have taken steps to contain the buildup. South Korea's Financial Services Commission unveiled measures in September to curb volatile single-stock leveraged ETFs. India's Reserve Bank of India banned loans against shares for purchasing securities or subscribing to IPOs in July. China's securities regulator raised the minimum margin requirement to 100% for new accounts in January. Raychaudhuri cautioned, however, that these measures have slowed the spread of risk rather than eliminated it. With interest rates rising across most of the region outside China, borrowing costs could add further pressure on leveraged positions.bloomberg+1

"The next margin-driven fault line may not replicate South Korea's footprint," Raychaudhuri wrote, "but could instead target the unique pockets of leverage quietly compounding across the region."reuters