China Index Futures Fall in Singapore on Margin Curb Concern

Chinese stock-index futures slumped amid speculation increased regulatory scrutiny of margin loans will spur some leveraged investors to reduce holdings.

SGX FTSE China A50 Index futures for January delivery dropped as much as 5.2 percent before paring losses to 2 percent at 11:41 p.m. in Singapore. Chinese regulators plan to start a new round of checks on the margin lending businesses of brokerages as soon as this week, people familiar with the situation said. The China Securities Regulatory Commission didn’t immediately reply to a fax and e-mail seeking comment. Chinese stocks traded in New York declined.

China’s benchmark Shanghai Composite Index sank the most since 2008 on Jan. 19 after regulators suspended three of the nation’s biggest brokerages from adding new margin accounts and told securities firms to stop lending to traders with less than 500,000 yuan ($80,035). Margin debt, which can magnify losses for investors when stocks fall, increased to a record 773.8 billion yuan on the Shanghai exchange Tuesday after a tenfold increase during the past two years.

“Futures are very sensitive to this type of news, especially given what we experienced last Monday,” said Hao Hong, head of China research at Bocom International Holdings Co. in Hong Kong. “Regulators are concerned about excessive leverage still employed in the market, as well as its continuing growth.”

Correction Pressure

In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest from a brokerage. The loans are backed by the investors’ equity holdings, meaning they may be forced to sell when prices fall to repay their debt.

The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF, the largest U.S. exchange-traded fund that tracks mainland Chinese stocks, dropped 3.3 percent in New York to a one-week low of $35.36. The iShares China Large-Cap ETF, the largest Chinese ETF in the U.S., slipped 1 percent to $42.47. The Bloomberg China-US Equity Index declined 0.5 percent to 113.16.

The Shanghai Composite fell 1.4 percent to 3,305.74 on Wednesday after some banks reduced leverage for trust products investing in shares.

“It looks like regulators want to reduce leverage to cool the stock market and don’t want to see a very fast gain,” said Wang Weijun, a strategist at Zheshang Securities Co. in Shanghai. “The pressure for a correction is building up.”

The margin-lending assessments will focus on small- and medium-sized brokers, according to the people, who asked not to be identified as they weren’t authorized to speak publicly about the matter.

Regulators will examine brokers’ internal controls and business processes, the people said. Checks will also include brokers’ equity-lending businesses that facilitate short selling, they said. Reuters reported on a new round of brokerage checks earlier Wednesday.

— With assistance by Kyoungwha Kim

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE