NewChina ETFs in United States match plunge in Shanghai and Hong Kong markets

China exchange-traded funds trading in the United States faced heavy selling on Thursday, mirroring a sharp plunge in Shanghai stocks, after more brokerages in China said they would tighten margin rules and the central bank moved to soak up money market liquidity.

Among the biggest decliners, the Deutsche X-trackers Harvest CSI 500 China-A Shares Small Cap ETF dropped 7.2 per cent, while the KraneShares Bosera MSCI China A Share ETF declined 7.2 per cent and the Market Vectors ChinaAMC A-Share ETF sank 7.1 per cent.

ETFs with exposure to China’s onshore market, so-called A shares, were hit the hardest, with those funds tied to Chinese companies listed in Hong Kong and the United States hit to a lesser extent.

At least three Chinese brokerages, including Guosen Securities Co, Southwest Securities Co, and Changjiang Securities Co said on Thursday they would tighten margin requirements. The move comes as China’s central bank drains money from cash-flush banks in a move to mop up excess liquidity in the financial system.

The announcement 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 also contributed to the selling, said Aaron Dillon, a managing director with New York-based KraneShares.

"One of the positions was sizeable, so the market reacted negatively to that," said Dillon, whose firm KraneShares focuses on investing in China. "It’s kind of a knee-jerk reaction, where you have some of the fast money reacting, but no one really for the long haul is going to make a dramatic move."