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 The CSI300 index and the Shanghai Composite Index both slumped in
late afternoon trade, ending down and 6.5 pct, respectively, their
worst day since January 19 when markets fell over 7 percent on an
earlier crackdown on margin trading. In terms of points shed, the
two indexes suffered their heaviest single day loss since 2008.
The Shanghai Stock Exchange saw A share turnover hit 1.2 trillion
yuan ($193.57 billion), an all time record high, on the selloff.
In Hong Kong, the Hang Seng Index closed 2.2 percent down, and the
China Enterprises Index lost 3.5 percent, and some some major
mainland shares were trading at a discount to their Hong Kong
counterparts.
China's stock market has surged over 140 percent over the past 12
months despite a flagging economy, as retail investors, including
university students, barbers and janitors piled into the world's
best performing market, though economists have warned that, based on
economic fundamentals, the rally was unjustified.
Official data shows the surge has been accelerated by cheap credit,
with the outstanding value of margin finance hitting a record 2
trillion yuan on Tuesday.
On Thursday morning at least three Chinese brokerages, including
Guosen Securities Co, Southwest Securities Co and Changjiang
Securities Co said they would tighten margin requirements.
"The brokerages are front running what the regulator wants to do,"
said Bernard Aw, an analyst at ING Markets in Singapore.
Haitong Securities and GF Securities had made similar moves earlier
in the week.
"This is no longer an individual case, but an industry-wide
campaign," said Zhang Chen, analyst at Shanghai-based hedge fund
Hongyi Investment. "Clearly, they got guidance from regulators, and
this shows a change of government's attitude toward the margin
trading business."
LIQUIDITY DRAIN PLAYS ON NERVES
Key mainland sub indexes including property, energy and financial
services plunged more sharply, with both energy and property
slumping over 7 percent.
Shares in several Chinese brokers fell by between 6-8 percent.
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Tian Weidong, analyst at Kaiyuan Securities in Xi'an, said that the
sharp drop in financials was partly due to news that Central Huijin
Holdings, an asset management company controlled by Beijing, had
reduced its holdings in major state-owned banks China Construction
Bank and ICBC, both of which are index heavyweights.
The news was published on Wednesday by the Hong Kong Stock Exchange
in a daily disclosure report.
But he added that many investors were already looking for a reason
to sell, and the changes to margin financing sparked the stampede.
"Many investors have become very cautious and are looking for a
reason to take the profits they have already earned," he said.
The central bank's move to mop up excess liquidity in the interbank
market was a contributory factor in the sell off.
While there was no information on how much money was drained, and
money traders warned the adjustment could be minor, any suggestion
of a squeeze was seen as negative for stocks.
Analysts warned of the risk of volatility intensifying.
"If the stock market suddenly reverses and investors default on
their margin debts, the contagion effect will be much greater than
in previous cycles, since the banking system is now more exposed to
the brokerage industry," wrote Chen Long of Gavekal Dragonomics in a
research note.
(Repeats to fix formatting; no change to text)
(Additional reporting by the Shanghai Newsroom, Nate Taplin, and
Nichola Saminather in SINGAPORE; Editing by Simon Cameron-Moore)
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