The Shanghai Composite Index scored its biggest drop in more than six years after regulators reined in margin accounts by the country’s three-largest brokerages, fueling rumors of a broader crackdown on margin trading that has helped boost gains in the country’s stocks.
The index dropped 7.7 percent on Monday after the China Securities Regulatory Commission banned Haitong Securities, Citic Securities and Guotai Junan Securities from opening new margin trading accounts for three months. The announcement came at the close of trading hours on Friday after regulators probed margin trading accounts at 45 brokerages last month and found that some allow clients to delay repayment of financing longer than regulations allow.
The ruling pared gains in the stocks of Chinese securities companies, sending shares of both Citic and Haitong down 10 percent, the maximum allowable share-price change in a single day.
Citic admitted in a regulatory filing over the weekend that it has allowed margin trading accounts to extend beyond the six months allowed by regulation and said it would halt the practice. The firm also says it will start requiring a minimum of 500,000 yuan ($80,000) instead of 300,000 as was its practice.
The amount of Chinese shares purchased on margin makes up around 3.5 percent of total market capitalization in the nation after surging more than 10-fold in the past two years, according to Bloomberg News. Shares of brokerage firms are among the most bought on margin.
Shao Ziqin, an analyst for Citic, told the news agency that Citic shares bought on margin total about 3 percent of all outstanding margin loans, or about $5.2 bn. Outstanding margin loans made up some $123 bn as of Friday.
‘We think this is an incremental adjustment,’ Liu Jun, an analyst at Changjiang Securities, told the Financial Times. ‘The fast growth potential for margin financing and other emerging business areas at the brokerages hasn’t changed, but it’s developed too quickly. The regulators see risks in certain areas.’
