China ETFs Plunge in New York on Measures to Curb Margin Trading

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The largest U.S. exchange-traded funds tracking Chinese stocks sank on concern the nation’s equity markets will retreat after posting world-beating rallies as policy makers take measures to slow gains.

The iShares China Large-Cap ETF, tracking Chinese companies trading in Hong Kong, dropped 4.2 percent on Friday in New York for the steepest decline since January 2014. The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF tumbled 5 percent, the most in two months. A Bloomberg index of the most-traded Chinese equities in the U.S. lost 1.4 percent.

U.S.-traded ETFs and stocks followed the FTSE China A50 Index futures lower after policy makers banned the margin-trading businesses of brokerages from using so-called umbrella trusts and allowed fund managers to lend shares to short sellers, statements showed Friday. The changes follow advances of 23 percent in the Shanghai and Hong Kong stock indexes over the past month, the best performances among 93 global benchmarks tracked by Bloomberg.

“The policy intention is to slow the market growth,” Clem Miller, an investment strategist at Wilmington Trust, which manages $80 billion, said by phone from Baltimore on Friday. The rally is “really leverage-driven, and the Chinese authorities are keen not to repeat some of the mistakes the U.S. had in terms of leverage a few years ago.”

Bearish Trading

Investors have used umbrella trusts, which allow for more leverage than brokerage financing, to ramp up wagers on Chinese stocks. Margin debt on the Shanghai Stock Exchange climbed to a record 1.16 trillion yuan on Thursday. In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest.

Allowing funds to lend their stock holdings will expand the pool of equities available to short sellers, who have relied primarily on brokerages to supply them with the stock needed to execute the bearish bets.

The $7.4 billion iShares China Large-Cap ETF sank to $50.03, erasing a gain for the week. Deutsche Bank AG’s $1.2 billion fund, the biggest in the U.S. tracking mainland stocks, tumbled to $44.48. FTSE China A50 Index futures for April delivery tumbled 6 percent while contracts on the Hang Seng China Enterprises Index lost 2.6 percent.

We may see “a pullback immediately, then churning a bit and then it will start to rally again,” Matt Lloyd at Monument, Colorado-based Advisors Asset Management Inc., which oversees $14.2 billion, said by phone Friday. “We’ll see any significant pullback as a buying opportunity.”

The Shanghai gauge fell in three out of the four years through 2013, losing 35 percent, before it picked up last year.

Tarena International Inc. led a slump in Bloomberg’s China-US index. The Beijing-based professional education company sank 7.9 percent to $12.21. Qihoo 360 Technology Co., a computer security-software developer which also owns a web search engine, slid 4 percent to $59.04, dropping the most in a month.

Wowo Ltd., which completed a $40 million initial public offering on April 8 in the U.S., plunged 9.6 percent to $9.16, falling below its IPO price of $10.

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