Chinese stocks plunged the most in four months on record turnover as brokerages tightened lending restrictions and the central bank drained cash from the financial system.
The Shanghai Composite Index tumbled 6.5 percent to 4,620.27 at the close, dragged down by financial and commodity companies. Citic Securities Co., the biggest-listed brokerage, plunged 9.4 percent after several smaller rivals increased their margin requirement, the collateral put up by an investor when borrowing. Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. slid at least 5 percent after the sovereign investment firm trimmed its stake in the two lenders.
Record growth in margin debt helped fuel a 127 percent gain in the Shanghai gauge over the past year, the most among global indexes tracked by Bloomberg. Margin lending by brokerages exceeded 2 trillion yuan ($322 billion) as of May 27, five times the level of a year earlier, stock exchange data showed.
“The whole nature of the China market, it’s all on leverage, all on margin trading, so margin calls will further push the market as retail investors are forced” to put up more funds, said Michael-Douglas Lee, a Hong Kong-based trader at SG Securities Ltd.
Hong Kong’s Hang Seng China Enterprises Index dropped 3.5 percent, while the Hang Seng Index retreated 2.2 percent. The CSI 300 Index plunged 6.7 percent. Trading values on both the Shanghai and Shenzhen stock exchanges reached a record 2.3 trillion yuan.
The Shanghai Composite climbed as high as 4,986.50 on Thursday before faltering in its bid to reach the 5,000 level for the first time since 2008.
The benchmark gauge has surged over the past year on speculation the central bank will add to cuts in interest rates and lenders’ reserve-requirement ratios as well as widen access to capital markets in the mainland. It traded at 24.3 times reported profit on Wednesday, compared with the seven-year average of 15.5.
“Being close to 5,000, investors worried there will be some policy to pull down the market sentiment,” said Ben Kwong, a director at brokerage KGI Asia Ltd. in Hong Kong. “It’s just an interim correction.”
All 10 industry gauges in the CSI 300 dropped more than 5 percent, with measures of financial, energy and material companies sliding at least 7 percent.
Changjiang Securities Co. dropped 9.5 percent after joining rivals GF Securities Co. and Haitong Securities Co. in increasing its margin requirement. Guosen Securities Co. tumbled 9.9 percent after the brokerage raised its margin requirement on 908 stocks, according to a statement Wednesday.
ICBC fell 5 percent, while Construction Bank slid 5.9 percent. Central Huijin Investment Ltd. cut its holdings in ICBC’s Shanghai-listed shares to 45.89 percent from 46 percent, and in Construction Bank to 2.14 percent from 5.05 percent, according to separate filings to the stock exchange. The firm holds stakes in financial institutions on behalf of the government. The Shanghai Securities News reported Thursday regulators asked lenders to report their investment in stocks.
“Central Huijin cutting holdings of bank stocks was a trigger for the drastic fall as it has big impact on investor sentiment,” Central China Securities strategist Zhang Gang said by phone.
China’s central bank drained tens of billions of yuan from the financial system by selling repurchase agreements to targeted financial institutions, according to two people familiar with the matter. The People’s Bank of China, which has halted open-market operations for the last six weeks, didn’t immediately respond to a fax seeking comment.
“The news on PBoC draining liquidity with a targeted repo suggest that the PBoC deems the current interest rate level about right and has little intention to push rates further lower,” said Yao Wei, a China economist at Societe Generale SA. “The chance of imminent RRR cuts is declining.”
PetroChina Co., the nation’s largest company by market value, slid 8.6 percent, the biggest contributor to declines on the Shanghai Composite and halting a five-day, 9.7 percent rally. Jiangxi Copper Co. slumped 6.2 percent. Poly Real Estate Group Co. led declines for developers, plunging 8.5 percent.
Stocks also fell before a flood of new share sales. Subscriptions for 23 initial public offerings including China National Nuclear Power Co. may lock up 4.9 trillion yuan ($790 billion) of liquidity starting early June, according to the median estimate of six analysts surveyed by Bloomberg.
“We are seeing another wave of profit taking today, with investors locking in gains in banks and insurance companies, as placement overhang and new IPOs weigh on sentiment,” said David Welch, head of equity sales trading at Reorient Group in Hong Kong.
Shanghai Golden Bridge InfoTech Co. jumped 44 percent in its debut, matching a similar jump by more than 100 companies that listed in the past year.