Crackdown on margin trades sends China’s stocks reeling

Bloomberg News

Chinese equities plunged the most in six years, led by brokerages, after regulatory efforts to rein in record margin lending sparked concern that speculative traders will pull back from the world’s best-performing stock market.

The Shanghai Composite Index sank 7.7 percent to 3,116.35 at the close, its steepest drop since June 2008. Citic Securities Co. and Haitong Securities Co., the nation’s two biggest listed securities firms, fell by the 10 percent daily limit after they were suspended from loaning money to new equity-trading clients and regulators said brokerages shouldn’t lend to investors with assets below 500,000 yuan. About nine stocks dropped for each that rose on the Shanghai gauge, with more than 100 companies retreating by the maximum allowed.

The penalties have raised concern that policy makers are trying to curb a surge in stock purchases using borrowed money, after outstanding margin loans surged to 1.1 trillion yuan ($177 billion) as of Jan. 16 from about 400 billion yuan at the end of June. The Shanghai Composite index jumped 67 percent in the past 12 months through last week on record volumes as individual investors piled into the market.

“Regulators are concerned that shares have run too hard, too fast,” said Hao Hong, a strategist at Bocom International Holdings Co. in Hong Kong. “They want a measured increase in the stock market. After all, margin financing is one of the reasons for people to be bullish on brokerage stocks, and these stocks have run particularly hard.”

The Shanghai measure advanced 2.8 percent last week, a 10th week of gains that’s the longest winning streak since May 2007, after credit growth expanded and speculation grew the central bank will cut reserve-requirement ratios.

An index of financial companies tumbled by a record on the CSI 300 Index, which fell 7.7 percent. The Hang Seng China Enterprises Index of mainland shares traded in Hong Kong sank 5 percent, while the Hang Seng Index fell 1.5 percent. A gauge of volatility rose to a five-year high in Shanghai.

Citic Securities, Haitong Securities and Guotai Junan Securities Co. were suspended from lending money and stocks to new clients for three months, the China Securities Regulatory Commission said on its microblog on Jan. 16 after the market closed.

The regulator punished nine other brokerages for offenses including allowing unqualified investors to open margin finance and securities lending accounts, it said. On the same day, the China Banking Regulatory Commission banned banks from lending to companies that borrow to invest in equities, bonds, futures and derivatives. So-called entrusted loans extended by banks increased to about 458 billion yuan in December, the most since data became available in 2012.

“China is trying to rein in over-bullishness in the stock market as moves have been exaggerated,” Pauline Dan, Hong Kong-based head of Greater China equities at Pictet Asset Management Ltd., said by phone. “Investors will have to wait and see until this volatility settles. They don’t have a fundamental reason to stay long since government policy is driving the market.”

The amount of shares purchased on margin has surged more than tenfold in the past two years to a record 1.1 trillion yuan ($179 billion), or about 3.5 percent of the nation’s market capitalization. The Shanghai and Shenzhen exchanges expanded the number of stocks available for margin trading to 900 from 695 in September.

The CSI 300 financial index tumbled 9.6 percent, the most according to Bloomberg data going back to July 2007. Ping An Insurance Group Co., China Minsheng Banking Corp. and Bank of China Ltd. all fell by the daily limit. Other large-cap stocks also slumped, with PetroChina Co. falling 9.2 percent and Agricultural Bank of China Ltd. dropping 9.9 percent.

Citic said in a stock filing Monday that it raised the minimum requirement for opening margin lending accounts to 500,000 yuan from 300,000 yuan.

In a margin trade, investors use their own money for just a portion of stock purchases, borrowing the rest from a broker. Loans are backed by the investors’ equity holdings, meaning they may be forced to sell when prices fall to repay their debt.

Small-cap stocks are favorites of margin traders, Yu Liang, an analyst at Deutsche Bank AG, wrote in a Jan. 5 report. Beijing-based Sumavision Technologies Co., which makes and sells digital TV software and hardware products, has $238 million of shares bought on margin, or 17 percent of its market capitalization, according to the report. Xuzhou Combustion Control Technology Co. has $112 million or 23 percent of the stock’s market value.