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Chinese stocks drop sharply as regulator cracks down

Jan 19, 2015 at 11:36 am in Market Commentary by contrarianuk

shanghai index jan 22

Chinese shares had a record 7.7% drop today after an unprecedented 53% gain in 2014 after financial regulators finally clamped down on speculators buying shares on margin. The Shanghai Composite Index dropped 260 points to close at 3117, the largest fall since June 2008 after the index hit a 65 month high on Friday. Prior to today’s losses, the index was up 4.4% for the month to date with financials dropping 9.6%, with all 14 banking stocks down by their maximum 10% daily limit.  The Shanghai exchange has a circuit brake in place for individual shares, limiting a single trading day fall to 10%.

The China Securities Regulatory Commission said on Friday it had banned the country’s biggest brokers Haitong Securities, Citic Securities  and Guotai Junan Securities from opening new margin trading accounts for customers for three months, following investigations into high-risk margin trading. Citic lost 23% and Haitong dropped 18% respectively on the news. A further nine brokerages were all named by the regulator and were accused of infractions included allowing customers to delay margin repayments by longer than currently allowed. Regulations require that when a financing contract expires, brokerages reassess the borrower’s risk profile before issuing a new loan.

Margin borrowing by Chinese investors to allow them to buy equities has surged in recent months with outstanding margin loans standing as of Friday at Rmb767 billion ($123 billion), according to Shanghai Stock Exchange data, from Rmb444 billion at the end of October.

After the astonishing gains in the Chinese stock market lately, a pull back on any attempt by regulators to dampen down the frenzy had a predictable result. Clearly some brokerages have gotten a little carried away in giving investors flexibility to trade on margin and just like the impact of the Swiss Franc – Euro ceiling removal by the Swiss Central Bank and its devastating impact on some traders and brokers, one wonders what a major correction in the Chinese stock market could trigger. For now it seems like a sensible move by the China Securities Commission to take a little froth off the market and seek a reality check.

Contrarian Investor UK

IMPORTANT: The posts I make are in no way meant as investment suggestions or recommendations to any visitors to the site. They are simply my views, personal reflections and analysis on the markets. Anyone who wishes to spread bet or buy stocks should rely on their own due diligence and common sense before placing any spread trade.

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