China Stocks Close Higher After Margin Curbs Spark 5.4% Rout

China’s benchmark stock index erased losses of as much as 5.4 percent to end higher as energy and financial companies rallied. Shares earlier tumbled on news a brokerage suspended margin financing for investors in smaller companies.

The Shanghai Composite Index gained 0.8 percent to 4,947.10 at the close, even as almost two shares dropped for each that rose. Bank of Communications Co. jumped by the 10 percent daily limit to a five-year high, while Bank of China Ltd. and China Shenhua Energy Co. climbed more than 4 percent. The ChiNext index of smaller companies fell 1 percent, paring a drop of 7.2 percent. Golden Sun Securities Co. removed ChiNext stocks from its list of shares eligible for margin trading, citing the gauge’s recent gains and high price-to-earnings ratios.

“The market has realized that Golden Sun Securities is a small brokerage and it was an overreaction to the news,” said Dai Ming, a Shanghai-based fund manager at Hengsheng Asset Management Co. “It was like one-off panic selling. The most important thing is that we still haven’t seen a big change in the regulator’s attitude to the bull market, and the government still supports the market.”

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

‘Slow Bull’

The CSI 300 Index rose 0.7 percent, while the Shenzhen Composite Index dropped 0.6 percent from a record high, paring an earlier 6.2 percent tumble. The Hang Seng China Enterprises Index added 0.1 percent at the close and the Hang Seng Index fell 0.4 percent.

The Shanghai Composite has jumped 53 percent this year, the most among the world’s major stock markets. The index is valued at about 20 times projected earnings, while the Shenzhen gauge trades at more than 40 times estimated profits, the highest level among gauges in major stock markets worldwide. The Nasdaq Composite Index in the U.S. trades at a multiple of about 23.

China’s bull market will continue as the government continues to ease monetary and fiscal policies, and the market faces low systemic risks, the official Xinhua News Agency said in a May commentary. Declines could help the market enter a “slow bull” mode advocated by regulators, it said.

Bank Reform

Gauges of financial and energy stocks advanced more than 3 percent, the best performers among the CSI 300’s industry groups.

BoCom, the nation’s fifth-largest lender that’s part-owned by HSBC Holdings Plc, surged to the highest close since January 2010 in Shanghai and rose 5.5 percent in Hong Kong after people familiar with the matter said its final mixed-ownership reform plan, which would permit private investment in state-owned lenders, 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.

Bank of China climbed 5.1 percent. Shenhua, the nation’s largest coal producer, advanced 4.1 percent, leading The CSI 300 Energy Index to a five-week high.

Tsinghua Tongfang Co. fell 3 percent as technology stocks declined on concern valuations have risen too high. The CSI 300 Information Technology Index fell 1.7 percent, paring a plunge of 7.8 percent, the biggest intraday loss since July 2009. The gauge is valued at 52 times forward earnings, almost three times more expensive than the broader CSI 300 measure.

Tsinghua Tongfang owner Zhao Weiguo, who became a billionaire buying semiconductor companies, said the industry has entered a “serious bubble” in China.

Stocks has also plunged earlier 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.”

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

— With assistance by Shidong Zhang

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