China Stock Turmoil 2015

China stocks plunge most in three months on broker probe, growth fears

Broader investigation into brokerage sector and ongoing bearish economic news spark biggest sell-off in mainland shares since late August

PUBLISHED : Friday, 27 November, 2015, 9:16am
UPDATED : Saturday, 28 November, 2015, 2:14am

Mainland stocks suffered their worst sell-off since late August on Friday, as investors dumped equities on fears about Beijing’s crackdown on stock speculation and further signs of economic slowdown.

Sentiment was battered by a barrage of bearish news, including a widening probe of the brokerage sector by regulators, a big drop in industrial profits, and the weakest yuan mid-point fix in about three months.

The Shanghai Composite Index sank 5.5 per cent, the steepest percentage decline since August 25, wiping out all the gains for the index since early this month.

The large-cap CSI300 slid 5.4 per cent, the tech-heavy Shenzhen Composite Index plummeted 6.1 per cent, and the ChiNext Index skidded 6.5 per cent.

In Hong Kong, the Hang Seng Index declined 1.9 per cent, resulting in a loss of 3 per cent for the week, while the Hang Seng China Enterprises Index fell 2.5 per cent on Friday.

A slump in the brokerage sector led the broad sell-off in markets, amid news that Beijing is widening a probe and intensifying its crackdown on speculative trading.

The ongoing curbs on margin financing are taking a toll on the A-share market
Louis Tse, VC Brokerage

A China Securities Regulatory Commission spokesman told a briefing after the market close that brokers would be banned from providing funding for stock purchases via over-the-counter derivatives, confirming earlier media reports.

Louis Tse Ming-kwong, director at VC Brokerage, said: “the ongoing curbs on margin financing are taking a toll on the A-share market, with pressure spilling over to Hong Kong, as the fund flows across the border are intertwined.”

Shares of Citic Securities and Guosen Securities dived 10 per cent on Friday in Shanghai and Shenzhen respectively, after the two firms both announced they were under investigations by the CSRC for alleged violations of mainland securities rules. In Hong Kong, Citic Securities fell 5.4 per cent.

Haitong Securities, China’s second-largest broker by assets, halted trade in its shares in Shanghai and Hong Kong shortly after the markets opened. After they closed it announced that it was also being probed by the mainland regulator for alleged rule violations.

A number of other brokers also hit the daily price drop limit of 10 per cent on the mainland, including Huatai Securities, Orient Securities, Industrial Securities and Founder Securities.

Analysts from Credit Suisse said in a note that the suspension of new equity swap business, combined with an increase in margin requirement announced recently, signalled that Beijing was striving to curb speculative trading and prevent systemic risks in stock markets.

The ban on new equity swap business indicated that “business uncertainties (for the brokerage sector) are still elevated and (it) may lead to further volatility in the near term”, HSBC analysts said in a separate report.

Analysts said weak economic data from China and fears of yuan devaluation added to pressure on the markets.

“The big drop in Chinese industrial profits plus the weakest CNY (Chinese yuan) mid-point fix since 31 August appear to have set off a wave of selling in equity markets across Asia,” said Angus Nicholson, an analyst for IG Group, adding that investors were worried about “the potential for China to steadily devalue the CNY”.

“It appears China devaluing its currency heightens concerns over its ability to consume global exports,” he added.