Margin curbs send Chinese equities plunging

An investor checks share prices at a brokerage in Beijing. Financial sector shares crashed on Jan 19, 2015 with many brokerages, banks and insurers seeing major declines. [Photo/China Daily]

Benchmark declines by 7.7%, biggest loss since global financial crisis

The mainland stock market recorded its biggest loss on Monday since the global financial crisis of 2008 after the securities regulator reined in margin lending, but analysts said the bull market still has further to run.

In addition to forbidding some brokerages from opening new margin accounts, media reports said that the authorities are likely to accelerate initial public offerings in the coming months to soak up some of the liquidity that has been driving a sharp rally.

The benchmark Shanghai Composite Index sank 7.7 percent to 3,116.35 points, but with transaction volume standing at the regular amount. The financial sector crashed, as the majority of brokerages, banking and insurance firms fell by the daily limit of 10 percent.

The losers included Industrial and Commercial Bank of China Ltd, Ping An Insurance (Group) Company of China Ltd and CITIC Securities Co Ltd.

In Hong Kong, the Hang Seng Index retreated 1.5 percent, with CITC Securities and Haitong Securities Co Ltd, the nation's two biggest brokerages, both tumbling more than 16 percent.

The China Securities Regulatory Commission on Friday barred CITIC Securities, Haitong Securities and Guotai Junan Securities Co Ltd from opening new margin trading accounts for three months.

The regulator had determined that the three failed to correct violations of rules prohibiting rollovers of margin trading contracts. Another nine brokerages received warnings.

The CSRC said late Monday that regulating the market is not intended to pressure stocks and called for proper understanding of the policy.

"The CSRC is clearly sending a warning, especially to retail investors", said Kevin Leung, strategist with Haitong International Securities Group Ltd in Hong Kong.

Prior to Monday, the benchmark Shanghai index had been up 4.4 percent so far this month after finishing 2014 with a 53 percent surge.

Because 80 percent of the transactions in the A-share market are by retail investors, who have been piling up margin positions amid the rally, analysts said the authorities had been concerned that margin trading was leveraging the risks in the equity market.

Outstanding margin loans surged to 1.08 trillion yuan ($174 billion) as of Jan 13 from about 400 billion yuan at the end of June, according to Bloomberg.

"The CSRC's announcement regarding margin trading activity was a nasty shock. With less incremental liquidity flowing into stocks and dampened sentiment, the market will correct in the near term, and the move may be violent," Hong Hao, chief strategist with BOCOM International Holdings Co, wrote in a research note on Monday.

Profit-taking also drove down prices on Monday, said Leung.

CITIC Securities said in a filing to the exchange in Hong Kong on Friday that its biggest shareholder, CITIC Group Corp, had sold 348 million shares from Jan 13 to Jan 16, raising more than 11 billion yuan in cash.

The plunge on Monday does not signal an end to the A-share rally, analysts said.

"A correction will create another entry opportunity for those who have missed out," Hong said.

A private equity fund manager based in Shanghai agreed. "The recent rally in financial shares was overdone and the market will go through a technical correction. It will head for gains again within several days,"

Leung had a different take. "I personally cannot find any support in the fundamentals for the recent aggressive valuation pickup in bank and other financial shares," he said, adding the momentum for big-cap A shares was over, while H shares would have a bigger chance to pick up as they are trading at heavy discounts to A shares.

At a glance

Why did mainland stock markets fall on Monday?

Share prices on the Shanghai and Shenzhen stock exchanges plunged on Monday after the securities regulator rapped three major brokerages for continuing to lend money for stock purchases in violation of rules. As punishment for extending "margin trading" contracts, the brokerages cannot offer credit to new customers for three months.

What was the quantum of the fall?

At one point during the intraday trading, the Shanghai Composite Index declined by nearly 8.3 percent. It later trimmed that to end the day at a loss of 7.7 percent. Share prices of brokerages were hardest hit, with some falling by the daily limit of 10 percent.

Why did the capital market see such a steep decline?

Investors and analysts believe that the penalties imposed on the brokerages are a precursor to more curbs on credit-financed trading. The authorities are looking for ways to halt the boom in the stock market over fears that it could turn into a bubble and damage the broader economy. The index surged 54 percent last year, partly because of easy credit that investors used to finance their trading. Market sell-offs can also become self-reinforcing as other investors sell from fear that they will incur losses if they do nothing.

Why was the decline not reflected in other Asian markets?

Even though the fall was particularly steep, investors in other markets brushed it off as a situation peculiar to China. The government only allows limited foreign investment in mainland stocks and the country's financial system is largely walled off to the rest of the world. A bigger catalyst for markets will come on Tuesday when China reports fourth-quarter growth figures.

What are market experts saying?

"Margin financing is simply over-extended," said Dickie Wong, executive director of research at Kingston Securities Co. Regulators want to "simply give pause" to the brokerages. "In the past, mainland investors had no clue on margin financing and short selling, but after China introduced these two ways to trade stocks, people became so happy because they can borrow money and just go all in."