China’s stocks capped their biggest three-day retreat since June 2013 on concern valuations are too high given an increasing supply of shares and prospects for a regulatory clampdown on margin trading.
Utilities and industrial companies, which posted the biggest gains in Shanghai in the past three months, led declines. China Railway Group Ltd. and Huadian Power International Corp. dropped at least 9 percent. PetroChina Co. and shipping companies lost more than 3 percent before Friday’s trade data. The interest rate for overnight loans on the Shanghai Stock Exchange surged to a three-week high as investors borrowed to bid on initial public offerings.
The Shanghai Composite Index fell 2.8 percent to 4,112.21 at the close, extending losses to 8.2 percent since May 4. Stocks have dropped from seven-year highs as the securities regulator increased the pace of new share offerings and took action to curb leverage after a world-beating rally. China Securities Finance recommended controls over margin trading and short selling at a seminar with China Securities Regulatory Commission Assistant Chairman Zhang Yujun, China Business News reported Thursday.
“For A shares, the risk-reward is deteriorating in China,” Jonathan Garner, Morgan Stanley’s Hong Kong-based head of strategy for Asia and emerging markets, said in a phone interview Thursday. “It’s likely to be the case where volatility will increase.”
Morgan Stanley downgraded Chinese stocks for the first time in more than seven years, saying the market has become expensive after share prices surged and profitability fell to the weakest level since the global recession in 2009.
The CSI 300 Index declined 1.8 percent. Hong Kong’s Hang Seng China Enterprises Index fell 1.6 percent, while the Hang Seng Index lost 1.3 percent. The Bloomberg China-US Equity Index retreated 1.5 percent on Wednesday.
China Securities Finance, which was created in 2011 to lend money and securities to brokerages, proposed that brokerages’ outstanding margin trading and short selling shouldn’t exceed four times their net capital as of the end of the previous month, and should stop lending to investors who use borrowed money to buy stocks with high price-to-earnings ratios or net losses, China Business News reported, citing an unidentified participant.
Margin traders increased holdings of shares purchased with borrowed money on Wednesday, with the outstanding balance of margin debt on the Shanghai Stock Exchange rising by 1.2 percent to a record 1.26 trillion yuan ($203 billion).
The Shanghai Composite has rallied 105 percent over the past year amid speculation the government will extend interest-rate cuts and speed up mergers of state-owned firms. The index is valued at 16 times 12-month projected earnings, compared with the five-year average multiple of 10.2, according to data compiled by Bloomberg. Trading volumes in the index were 32 percent lower than the 30-day average for this time of day.
China Railway Group slid by the 10 percent daily limit, extending yesterday’s 5.8 percent drop. China Railway Construction Corp. fell 10 percent. Huadian Power slid 9 percent. A gauge of utilities in Shanghai jumped 57 percent over the past three months through yesterday. Industrial companies surged 71 percent, the most among CSI 300 industry groups.
PetroChina retreated 3.5 percent and Cosco Shipping Co. plunged 6.7 percent before Friday’s data on exports and imports. Overseas shipments probably rose 1.3 percent in April, while inbound shipments fell 12.7 percent, according to median estimates in a Bloomberg survey.
China Life Insurance Co., the nation’s biggest insurer, slid 6 percent after jumping 6 percent Wednesday. China Pacific Insurance (Group) Co. dropped 5 percent.
Twenty-five companies are scheduled to sell IPO shares from Tuesday through May 11, which may freeze 2.34 trillion yuan, according to data compiled by Bloomberg. IPO shares have jumped 44 percent on average on the first day of trading this year. The interest rate for overnight loans on the Shanghai exchange surged 407 basis points to 6.11 percent, the highest since March 12.
— With assistance by Shidong Zhang, and Kyoungwha Kim