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The value of stocks traded in Shanghai and Shenzhen reached a record 2.42 trillion yuan, exceeding Tuesday's 2.16 trillion. Photo: Imaginechina

Update | Sharp correction in Shanghai, Shenzhen and Hong Kong stock markets

More selling expected as margin calls accelerate following plunge of 6.5pc in Shanghai, 5.5pc in Shenzhen and more modest 2.2pc in Hong Kong

Analysts predict today will see more selling of mainland shares after the sharp correction in the Shanghai, Shenzhen and Hong Kong stock markets yesterday, in a vicious cycle of selling as margin calls accelerate with the falling markets.

In one of its biggest single-day drops, the Shanghai Composite Index plunged 6.5 per cent to 4,620.27 points yesterday, while the Shenzhen Composite Index plummeted 5.52 per cent to 2,756.93 points. The Hang Seng Index closed down 2.23 per cent, or 626.9 points, at 27,454.31 points in its biggest one-day fall since December, while the Hang Seng H-share Index closed down 3.53 per cent, or 518.88 points, at 14,183 points.

The total value of stocks traded in Shanghai and Shenzhen reached a record of 2.42 trillion yuan (HK$3.06 trillion), breaking Tuesday's milestone of 2.16 trillion yuan.

Louis Tse, a director of VC Brokerage, said there could be continued selling of mainland shares today in response to margin calls. "It's a domino effect," he said.

When stock prices fell, creditors who lent investors money to buy stocks would call in their margin loans, which would prompt further selling to repay the loans, Tse explained. There had been margin calls in the Hong Kong stock market yesterday, he said.

Margin debt on the mainland has more than tripled to over 2 trillion yuan from 400 million yuan in April last year, according to Credit Suisse.

Unless there was positive news from the mainland, Hong Kong stocks would also come under selling pressure today because of margin calls, Tse predicted.

Jason Chan, associate manager at Southwest Securities, said market jitters weighed on mainland financial stocks after Central Huijin Investment, a state-owned investment firm, sold 1.63 billion yuan of Industrial and Commercial Bank of China A shares and 1.91 billion yuan of China Construction Bank A shares on Tuesday.

ANZ Research noted recent reports that the People's Bank of China had drained 100 billion yuan of liquidity from mainland banks by selling them bond repurchase agreements, raising fears that the central government might end its monetary easing. ANZ said it did not indicate a change of government monetary policy, but rising credit risks had made many mainland banks more risk averse.

State news agency Xinhua said another reason for the sell-off was the recently toughened regulation of the capital markets by the China Securities Regulatory Commission and China Banking Regulatory Commission. On May 22, the CSRC's website announced a raft of penalties for illegal stock market activities.

"The correction seems to be driven by investors selling to have funds for the next wave of IPOs as well as margin lending tightening," said Gerry Alfonso, a director of Shenwan Hongyuan Securities. "It is logical that after the enormous growth in [margin lending] business, brokerage houses are starting to become more cautious."

This article appeared in the South China Morning Post print edition as: Sharp correction hits mainland, HK bourses
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