China’s stocks fell, sending the benchmark index toward its steepest weekly loss since 2008, amid concern the government will clamp down on margin trading and valuations are excessive after a world-beating rally over the past year.
The Shanghai Composite Index dropped 1.5 percent to 4,712.15 at 9:33 a.m., extending this week’s slump to 8.7 percent. Losses were led by technology companies and power producers. Leshi Internet Information & Technology (Beijing) Co. and Wangsu Science & Technology Co. decreased more than 5 percent. SDIC Power Holdings Co. declined 4 percent.
The Shanghai gauge dropped as analysts warned the stock market is in a bubble that will burst after it reached its highest levels in seven years and the 21st Century Business Herald reported the securities regulator is working on margin-trading risk management rules for securities firms. Equities have also been weighed down by new share offerings that have lured an estimated $1.1 trillion in bids.
“The correction is mainly triggered by concern about high valuations of smaller companies and the regulator’s crackdown on margin debt,” said Zhang Haitong, chief strategist at Jinkuang Investment Management in Shanghai. “We may be close to the end of the correction. We may see cuts in interest rates or reserve requirement ratios again as the economy is still sluggish.”
The China Securities Regulatory Commission is considering new rules covering financial institutions’ asset management business, the Xinhua News Agency reported Thursday, citing Assistant Chairman Zhang Yujun. The CSRC announced last week that brokerages should limit margin trading and short selling at no more than four times their net capital.
Margin traders increased holdings of shares purchased with borrowed money on Thursday, with the outstanding balance of margin debt on the Shanghai Stock Exchange rising by 0.5 percent to a record 1.48 trillion yuan.
The CSI 300 Index declined 1.4 percent. Mainland markets will be shut on June 22 for a public holiday. Hong Kong’s Hang Seng China Enterprises Index climbed 1 percent. The Hang Seng Index added 0.8 percent. The Bloomberg China-US Equity Index, the measure of the most-traded U.S.-listed Chinese companies, retreated 0.4 percent in New York.
U.S. investors have never been so convinced that the rally in mainland stocks is ending. Short interest in the largest exchange-traded fund tracking yuan-denominated equities rose to a record 16 percent of shares outstanding Wednesday as bets on a price drop almost doubled from a month ago, according to data compiled by Markit and Bloomberg. Traders pulled $258 million from the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF last week, the most since the fund was created in 2013.
The Shanghai index has jumped 133 percent in the past 12 months and trades at 18 times 12-month projected earnings, compared with the five-year average multiple of 10.3, according to data compiled by Bloomberg.
Subscriptions for 25 IPOs including Guotai Junan Securities Co. may tie up the most funds since January 2014 when China resumed new share approvals, according to China International Capital Corp.
— With assistance by Shidong Zhang