China stocks sink 8 per cent on brokerage crackdown

China’s A-share market dropped the most in over six years on Monday following Beijing’s crackdown on brokerages’ margin business and a government proposal to tighten supervision of shadow banking products.

The Shanghai Composite Index dived 260.14 points, or 7.7 per cent, to 3,116.35 in the largest daily drop since June 10, 2008.

"The market took a cue from the central government, which obviously hoped to cap the wild gains in stock prices," said Zhao Long, a broker at Qilu Securities. "As fundamentals can't support the high prices, the recent strong rally has made top officials feel nervous."

On Friday, the China Securities Regulatory Commission (CSRC) banned Citic Securities, Haitong Securities and Guotai Junan Securities from opening new margin trading accounts for three months after the three major brokerages were found to have illegally rolled over margin trading contracts for clients.

The China Banking Regulatory Commission (CBRC) published draft rules yesterday aimed at intensifying supervision of entrusted loan products, a kind of shadow banking product that helps issuers raise funds that typically flow into assets such as property and stocks.

The CSRC last night issued a statement urging investors to stay calm and not to read too much into its policies, a clear signal that Beijing wants to avoid further market turmoil.

The Shanghai index is still up more than 50 per cent in the past six months, driven by an influx of fresh capital despite a slowing economy and lacklustre corporate earnings.

Market watchers said the authorities' efforts to rein in margin trading were aimed at retail investors and squeezing out speculative froth.

Margin trading - using money borrowed from brokerages to buy equities - has grown by leaps and bounds as thousands of retail investors rushed in to chase the bull run. Outstanding margin loans offered by brokerages more than doubled in the second half of last year.

Meanwhile, international investors have been selling out, with exchange-traded and mutual fund outflows hitting record levels. On December 9, the combined turnover on the Shanghai and Shenzhen stock exchanges hit a record of 1.24 trillion yuan (HK$1.54 trillion).

Brokerages were among the top decliners on the A-share market yesterday. Citic and Haitong both tumbled by the 10 per cent daily trading limit.

Of the Shanghai index's 1,038 constituent stocks, 876 fell, 92 rose and 70 were unchanged.

"The downward momentum will continue now that the top regulators have taken action to knock down the market," said Howhow Zhang, research head of fund consultancy Z-Ben Advisors.

The leadership is believed to be attempting to reinvigorate the equity market so that it can be used by companies to raise funds as it tries to deleverage an economy where non-performing banking loans are on the rise. But officials are also worried about a boom-to-bust scenario.

Hong Kong's Hang Seng China Enterprises Index, which tracks mainland firms traded on the local exchange, slumped 4.98 per cent yesterday, the biggest single-day decline since November 2011. The broader Hang Seng Index lost 1.5 per cent.