China’s stocks fell for a third day, sending the benchmark index to a one-week low, amid speculation increased regulatory scrutiny of margin loans would spur some leveraged investors to reduce holdings.
Citic Securities Co (中信證券) and Haitong Securities (海通證券) led declines for financial companies with losses of at least 2.3 percent.
The securities regulator —the China Securities Regulatory Commission — plans a new round of checks into the margin-lending businesses of brokerages, Xinhua news agency reported on Wednesday night.
“The authorities sent a signal that they don’t feel comfortable,” Deutsche Bank AG Hong Kong-based strategist Yuliang Chang said. The pace of growth in margin lending and umbrella trusts “is creating a systemic risk in the financial industry,” he said.
The Shanghai Composite Index dropped 1.3 percent to 3,262.31 at the close, paring this month’s gain to 0.9 percent.
Regulators are increasing scrutiny on margin financing and umbrella trusts after investors ramped up bets on rallying shares through the use of leverage.
The CSI 300 Index declined 1.2 percent. The Hang Seng Index lost 1.1 percent. The Bloomberg China-US Equity Index retreated 1.3 percent on Wednesday.
The Shanghai index has gained 59 percent over the past year, making it the best performer among 93 global indices tracked by Bloomberg, on speculation China’s central bank plans to ease monetary policy to support the economy. The measure is valued at 12.2 times 12-month projected earnings, compared with 7.9 for the H-shares gauge, according to data compiled by Bloomberg.
The Shanghai gauge sank the most since 2008 on Jan. 19 after regulators suspended three of the nation’s biggest brokerages from adding new margin accounts and told securities firms to stop lending to traders with less than 500,000 yuan (US$80,035). Margin debt increased to a record 775.9 billion yuan on the Shanghai exchange on Wednesday after a tenfold increase during the past two years.
Margin trading turnover represents 24.1 percent and 18.6 percent of the financials and property sectors’ total turnover respectively, according to Bocom International Holdings Co.
A gauge of financial shares in the CSI 300 dropped 1.9 percent. Guoyuan Securities Co (國元證券) fell 4.1 percent. Western Securities Co (西部證券) slumped 3.9 percent. China Life Insurance Co (中國人壽) declined 2.3 percent. Industrial & Commercial Bank of China Ltd (中國工商銀行) slid 2.8 percent.
The assessments will focus on 46 remaining brokerages after an initial 45 were checked, Xinhua said in the report. The China Securities Regulatory Commission said the checks were routine and should not be over-interpreted, it said.
The commission’s assessments will focus on small and medium-sized brokers, according to people who asked not to be identified as they were not authorized to speak publicly about the matter. Regulators will examine brokers’ internal controls and business processes, the people said.
In a margin trade, investors use their own money for a proportion of their stock purchase, borrowing the rest from a brokerage.
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