Stocks plunge most in six years on margin trading crackdown

Chinese shares dived on Monday, with the key Shanghai index taking its biggest tumble in more than six years, as investors reacted to a measures announced to clean up margin trading businesses.

The benchmark Shanghai Composite Index plummeted 7.7 percent to end at 3,116.35 points, the steepest daily fall since June 2008. The index climbed 2.77 percent last week, extending gains for 10-consecutive weeks after credit expanded and speculation about further easing in monetary policy grew.

The Shenzhen Component Index sank 6.61 percent on Monday to end at 10,770.93 points.

More than 1,900 stocks on the two bourses fell on Monday, with over 160 slumping by the daily limit of 10 percent.

China Securities Regulatory Commission announced Friday that 12 brokerage firms had been punished for violations of margin trading rules after a two-week inspection.

The three most severely punished brokers -- Citic Securities, Guotai Junan Securities and Haitong Securities -- fell by the 10-percent daily limit after they were suspended from lending money and stocks to new clients for three months.

On the same day, China Banking Regulatory Commission, the top banking supervisor, said it was considering rules to ban banks from lending to companies that borrow to invest in equities, bonds, futures and derivatives.

Analysts said the announcements indicated policy makers' intention to cool an excessive rise in the country's bourses. Strengthened checks on margin trading, which is believed to have fueled the recent rally, caused panic and hurt sentiment, they said.

Monday's slump started in the brokerage sector, mainly due to Friday's penalties and then spread, said Wang Chun, chief analyst with HSBC Jintrust, an investment firm.

Li Daxiao, chief economist with Yingda Securities, said China's stock markets had run too fast and corrections were necessary.

The measures, which aim to cool over-bullishness in the markets and benefit their long-term development, will not result in a bear market, Li said.

Stocks of commercial banks and insurance firms, except New China Life Insurance, which suspended trading on Monday, also fell by the daily 10 percent limit.

Also affecting sentiment was a fresh fall in housing prices across China's major cities.

China Vanke, the country's biggest property developer by market value, and Poly Real Estate, the second largest, both gave up 10 percent.

New home prices fell in 66 of the 70 cities monitored by the government and were unchanged in three cities in December compared with the previous month, according to data released on Sunday by the National Bureau of Statistics.