Chinese Stocks Slump as Broker Curbs Margin Lending for ChiNext

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China’s stocks fell, led by technology shares, as a brokerage suspended margin financing for smaller companies amid concern that gains have gone too far, too fast.

The Shanghai Composite Index plunged as much as 5.4 percent before paring losses to 2.3 percent at 2:09 p.m. local time. Golden Sun Securities Co. removed ChiNext index stocks from its list of shares eligible for margin trading Thursday, citing the gauge’s recent rally and high price-to-earnings ratios. The ChiNext slid 6.6 percent, paring its advance this year to 153 percent.

“The move highlights the risks” to investors, said Wei Wei, an analyst at West China Securities Co. in Shanghai. “More brokerages may follow. That would hurt market sentiment significantly as lots of investors have ChiNext stocks as their main holdings.”

Record growth in margin debt helped add more than $4 trillion to the value of Chinese shares this year. The rally is raising concern among some investors that valuations are reaching excessive levels. Bill Gross took to Twitter on Wednesday to say shares on the technology-heavy Shenzhen bourse are the next big trade for short sellers.

The Shenzhen Composite Index fell 3.1 percent from a record. The city’s benchmark index trades at more than 40 times projected earnings, the highest level among gauges in major stock markets worldwide. The Nasdaq Composite Index in the U.S. has a multiple of about 23.

The CSI 300 Index of China's largest companies slid 2.3 percent as a gauge of technology shares sank the most since 2009. The Hang Seng China Enterprises Index dropped 0.8 percent and the Hang Seng Index lost 1 percent.

IPO Lockup

Stocks also declined amid concern a flood of new share sales will divert funds from existing equities. China National Nuclear Power Co., the country’s second-biggest atomic power operator, locked up 1.69 trillion yuan ($273 billion) in bids for its initial public offering. That’s almost equivalent to the entire annual economic output of Hong Kong.

“The pressure from the IPO lockup of funds is just too large and there are no positive triggers,” said Gerry Alfonso, a sales trader at Shenwan Hongyuan Group Co. “It seems that investors don’t want to be caught in a technical correction and they are selling, which in turn makes the correction even worse.”

Tsinghua Tongfang Co. slumped 7.2 percent. The CSI 300 Information Technology Index plunged as much as 7.8 percent, the biggest intraday loss since July 2009. Tsinghua Tongfang owner Zhao Weiguo, who became a billionaire buying semiconductor companies, said the industry has entered a “serious bubble” in China.

Banks Rally

Bank of Communications Co. led gains among banks in Shanghai and Hong Kong on optimism that the government is poised to approve its reform plans.

Bocom, the nation’s fifth-largest lender and part-owned by HSBC Holdings Plc, surged 8.5 percent in Shanghai and gained 3.9 percent in Hong Kong after people familiar with the matter said its final mixed-ownership reform plan was submitted to the State Council about a month ago.

“This will lend support to Chinese banks’ earnings and shares in the medium term because the reform will better align employees and management’s interests with their performance,” said Chen Xingyu, a Shanghai-based analyst at Phillip Securities Research.

(An earlier version of this story corrected the spelling of Zhao Weiguo.)

— With assistance by Shidong Zhang

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