Jan 20,2015: Securities exchanges hit as Beijing clamps down on risky investment practices, leaving Shanghai index down by nearly 8%.
Shanghaiâ€™s stock market suffered its worst plunge in more than six years on Monday, after authorities cracked down on a risky lending practice used by the Chinaâ€™s biggest securities brokerages.
The Shanghai Composite Index sank 7.7% to 3,116.35 at close on Monday, after the China Securities Regulatory Commission (CSRC) banned the countryâ€™s three biggest security brokerages â€” Citic Securities, Haitong Securities and Guotai Junan Securities â€” from opening new margin trading accounts for the next three months. For every stock that rose on the index, nine fell.
The regulator posted news of the suspensions to its official microblog on Friday afternoon after the markets closed, and on Monday the extent of the damage became clear â€” CITIC Securities shares dropped 10%, while Haitong sank 13.7% and Guotai Junan was weakened by 7.31%.
Margin trading is essentially investing with borrowed money, and itâ€™s an inherently risky practice â€” individuals and companies that buy on margin stand to lose more than they originally invested.
Highly leveraged investors began ploughing their money into Chinese stocks after the Beijing government cut interest rates in November, fueling a protracted rally â€” the market had risen 36% by Friday, when the exchange recorded its highest close in 65 months.
While margin loans were around 400bn yuan (Â£42bn) last June, they had nearly tripled to 1.1tr yuan by Friday.
The surge is likelyto have spooked regulators, who are keenly aware of the risks posed to a highly leveraged financial system. The CSRC also said that it would closely supervise entrusted lending, a type of shadow banking that often serves as a back door for margin lending.
â€œRegulators are concerned that shares have run too hard, too fast,â€ Hao Hong, a Hong Kong-based strategist at Bocom International Holdingstold Bloomberg. â€œThey want a measured increase in the stock market. After all, margin financing is one of the reasons for people to be bullish on brokerage stocks, and these stocks have run particularly hard.â€
Despite Shanghaiâ€™s nosedive, Asian stock markets rose, as Wall Street rallied and oil prices rose. Tokyo rose 0.9% to 17,014.29, and Seoul rose 14.5 points to 1,902.62.
The rating agency Moodyâ€™s announced in a report that the credit profile of Chinese banks will be â€œlargely stable over the next 12-18 months,â€ despite risky financial practices and a broader economic slowdown.
â€œOur stable outlook reflects our assessment that, on balance, the developments in monetary policy, financial supervision and market reform will help stabilise banksâ€™ operating environment, their liquidity and their capital, but could also pressure their profitability, asset quality and support assumptions, over the next 12-18 months,â€ said Christine Kuo, vice-president and senior credit officer.
Source: The Guardian