China Stocks Fall for Worst Two-Day Loss in 18 Months on Brokers

China’s stocks tumbled for a second day, the biggest two-day loss since June 2013, amid speculation the government is taking measures to cool the world’s best-performing major stock market over the past month.

Citic Securities Co. and Haitong Securities Co., the nation’s biggest securities firms, both slid 9.1 percent. Some brokerages raised the threshold for margin trading and short selling to control risks, the 21st Century Business Herald reported, while data showed new stock-trading accounts dropped 29 percent last week. China Construction Bank Corp. and developer China Vanke Co. slumped more than 5 percent to drag down financial shares by the most among industry groups.

The Shanghai Composite Index fell 2 percent to 2,972.53 at the close, after plunging 3 percent yesterday. The securities regulator this month cautioned investors on buying shares and started inspecting some brokerages’ margin finance businesses. A 17 percent rally since end-November, spurred by policy easing speculation and leverage, has driven valuations to three-year highs as technical indicators signaled overbought conditions.

“There’s profit taking after a recent rally,” Zhang Yanbing, an analyst at Zheshang Securities Co., said in Shanghai. “Financial stocks have risen a lot recently so they’re correcting now. News-wise, it’s very quiet.”

The CSI 300 Index lost 2.8 percent, extending yesterday’s 2.1 percent decline. Hong Kong’s Hang Seng China Enterprises Index dropped 1 percent. The Hang Seng Index added 0.1 percent. Hong Kong’s markets closed at noon for the Christmas holidays.

Financials Drop

The Shanghai Composite has rallied 40 percent this year amid speculation the central bank will cut lenders’ reserve-ratio requirements to support growth after lowering interest rates for the first time in two years last month. The index traded at 11.7 times 12-month projected earnings through yesterday, the highest level in three years, according to data compiled by Bloomberg.

The Shanghai index’s 30-day volatility reached the highest level since May 2010, while trading volumes were 9.2 percent below the 30-day average. The gauge’s 14-day relative strength index, measuring how rapidly prices have advanced or dropped during a specified time period, reached 79.6 this week. Readings above 70 indicate a price may be poised to fall.

A measure of financial shares in the CSI 300 lost 5.5 percent today, paring a rally over the past month to 35 percent, the best performance among 10 industry groups. Ping An Insurance (Group) Co. plunged 7.1 percent, Bank of Communications Co. tumbled 5.4 percent and Poly Real Estate Group Co. dropped 5 percent. Citic Securities led declines for brokerages after surging 71 percent over the past month.

Spot Checks

Some brokerages raised new account thresholds for margin trading and short-selling businesses to control risks, the 21st Century Business Herald reported, without citing anyone. The regulator’s spot checks on Guotai Junan Securities Co., Shenyin & Wanguo Securities Co., Ping An Securities and GF Securities Co. have been completed, the newspaper reported.

The market rally is raising the prospect of government action to prevent a bubble, a potential threat to brokerage earnings that are projected to hit a seven-year high this year.

UBS Group AG says regulators could act to limit the use of credit in buying stocks. In 2007, authorities raised a trading tax following a sixfold increase in the Shanghai Composite Index over two years.

“While the stock market is extremely hot now, the question remains if such strong trading volumes will continue into next year,” said Tang Yayun, a Shanghai-based analyst at Northeast Securities Co. “This is a risk that we need to watch out for securities companies. The explosive growth in securities lending and margin financing isn’t sustainable.”

CSRC Probe

The amount of credit extended to investors to buy stocks climbed to 1 trillion yuan ($161 billion) as of Dec. 19, nearly triple the 344 billion yuan at the end of 2013, China Securities Finance Corp. data show.

The securities regulator has joined state media in warning investors of the risks of a stock reversal after touting equities three months earlier. The China Securities Regulatory Commission said Dec. 19 it is probing companies and individuals involved in suspected market manipulation on 18 stocks and has set up a task force. Most of these stocks are small companies listed in Shenzhen.

“After the CSRC said it will start investigating 18 stocks, investors are worrying investigations will spread to other stocks,” said Castor Pang, head of Research at Core-Pacific Yamaichi in Hong Kong. “The Shanghai Composite Index’s decline from its recent peak isn’t large enough. In the short term the index may have further to drop.”

A gauge of industrial stocks in the CSI 300 lost 1.5 percent today, the third-biggest drop among the groups. China Southern Airlines Co. plunged 6.7 percent and China Railway Construction Corp. retreated 9.6 percent. The two stocks have rallied at least 76 percent this year, compared with a 39 percent gain for the CSI 300.

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