Analysts say policy change to ease margin trading may worsen market's woes

As China's stock market slump spurs margin traders to unwind record bullish bets, the authorities have responded with a policy that analysts say could exacerbate the problem by making it even easier to take on even more leverage.

Hours after a one-day tumble of 5.2 percent in the Shanghai Composite Index, the securities regulator eased collateral requirements for leveraged investors and allowed brokerages to securitize margin loans - a move that frees up room to extend credit after a nine-fold surge in outstanding margin debt in two years. Brokerages have leeway to boost lending by about $300 billion, based on regulatory caps announced on Wednesday.

While a surge in leverage helped fuel the longest-ever bull market in Chinese stocks, traders have been closing out those positions for a record eight straight days as the Shanghai index tumbled more than 20 percent from this year's high. Even if relaxed rules help prevent a free-fall in share prices, the risk is that more leverage will expose amateur investors to even greater losses later and spur bigger price swings in the world's most-volatile market.