(Bloomberg) -- China’s margin debt for stock trades fell by the most since early 2016 as a deepening slump triggered a rush to unwind leveraged positions.  

The outstanding balance of margin debt fell by 2.7% on Monday, the most since January 2016, when the stock market was reeling from a historic crash from a mid-2015 peak.

The recent drop in margin trades have coincided with a heavier selloff for small cap shares, with the CSI 1000 Index falling more than 6% on Monday. Investors have cited margin calls as a likely driver behind the latest rout, with fears that a further decline in share prices may accelerate the downfall as investors are forced to liquidate positions. 

The total amount of leveraged trades dropped to 1.42 trillion yuan ($197 billion), the lowest in a year. 

China’s securities watchdog sought to placate investors, saying it will guide brokerages to adjust margin call levels and maintain flexible liquidation lines. The China Securities Regulatory Commission said late Monday that just 900 million yuan of leverage has been liquidated this year due to margin calls — about 0.06% of the total volume of such financing.

Read more: China CSRC to Guide Brokers on Adjusting Margin Call Levels  

China is also tightening trading restrictions on domestic institutional investors as authorities fight to put an end to the selloff. Some quantitative hedge funds have been banned from placing sell orders starting Monday, while a channel that can be used by mainland-based investors to short Hong Kong stock has been curbed, Bloomberg reported Monday. 

Equity gauges rebounded Tuesday as China’s state fund said it will continue to increase holdings of exchange-traded funds to maintain the smooth operation of the capital market. 

(Adds line on market moves)

©2024 Bloomberg L.P.