Photographer: Tomohiro Ohsumi/Bloomberg

China Stocks Fall for Second Day on Borrowing Clampdown Concern

China’s stocks fell for a second day, sending the benchmark index to a one-week low, on concern inflows into equities will slow after some banks reduced leverage for trust products investing in shares.

Industrial & Commercial Bank of China Ltd. and China Life Insurance Co. dropped at least 1.9 percent to lead declines for financial shares. Shaanxi Coal Industry Co. plunged 6.3 percent as energy producers slumped after the Shanghai Securities News said the nation’s biggest coal-producing province won’t approve new mines for five years. Poly Real Estate Group Co. slid 3.6 percent to pace a retreat for developers.

The Shanghai Composite Index fell 1.4 percent to 3,305.74 at the close. Investors have ramped up bets on rallying shares by borrowing through structures known as umbrella trusts, which allow for more leverage than brokerage financing. China Everbright Bank Co. will lower its leverage ratio for umbrella trusts from next week to reduce funding risks, the Securities Times reported yesterday, citing unidentified institutions.

“It looks like regulators want to reduce the 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 CSI 300 Index declined 1.4 percent. Hong Kong’s Hang Seng China Enterprises Index fell 0.6 percent, while the Hang Seng Index added 0.2 percent. The Bloomberg China-US Equity Index retreated 1.7 percent yesterday. Trading volumes in Shanghai were 26 percent below the 30-day average.

Morgan Survey

The Shanghai gauge has gained 62 percent over the past year, making it the best performer among 93 global indexes tracked by Bloomberg, on speculation the central bank will ease monetary policy to support the economy. The measure is valued at 12.4 times 12-month projected earnings, approaching the highest level since April 2011, according to data compiled by Bloomberg.

Cuts in interest rates or reserve-requirement ratios would be the next key potential catalyst for stocks, according to Morgan Stanley’s global survey of 55 investors. Investors are divided on the outlook for financial stocks in the next 12 months, with the sector receiving the most positive and negative votes in Morgan Stanley’s survey.

The Shanghai Composite tumbled the most in six years on Jan. 19 after regulators punished brokerages for irregular lending and forbade banks from lending to companies that borrow to invest in equities. The benchmark has since recouped all its losses as the value of shares purchased with borrowed cash rebounded to an all-time high.

Umbrella Trusts

The balance of margin trading debt rose to 773.8 billion yuan ($123.9 billion) on the Shanghai Stock Exchange yesterday, climbing to a record for a second day, according to data from the bourse.

Sub-indexes of financial and energy stocks slid at least 1.4 percent today. China Life, the nation’s biggest insurer, fell 4.3 percent, while ICBC, the largest lender, lost 1.9 percent. China Minsheng Banking Corp. declined 2.5 percent. Haitong Securities Co. retreated 0.9 percent.

Goldman Sachs Group Inc. estimated up to 500 billion yuan has entered stocks through wealth-management products. Use Trust data show 43.1 billion yuan of securities investment trusts were set up last quarter, 92 percent up from a year ago.

In umbrella trusts, private investors take up the junior tranche, while cash from trusts and banks’ wealth-management products form the senior tranches. The latter receive fixed returns while the former take the rest, so private investors are effectively borrowing from trusts and banks. The higher leverage allowed by the products exposes individuals to larger losses in the event of stock-market drops, which can be exaggerated as investors scramble to repay debt during a selloff.

Property Concern

A gauge of property stocks in the Shanghai index slid 2.3 percent for the steepest loss among the five industry groups. Poly Real Estate Group extended losses to a third day, while Gemdale Corp. declined 1.2 percent.

China’s banking regulator in Shanghai asked local lenders to conduct the widest-ever tests on their exposure to the struggling real-estate industry. Authorities’ and investors’ concerns are mounting after data last week showed that Chinese lenders’ bad-loan ratio increased the most in at least a decade. Kaisa Group Holdings Ltd. missed a $23 million interest payment earlier this month, putting it at risk of defaulting on its dollar-denominated bonds.

“I’m holding the view that there won’t be any imminent improvement in the property market,” said Jinsong Du, a Credit Suisse Group AG Hong Kong-based analyst.

SOE Reform

China Shenhua Energy Co. lost 1.6 percent and China Coal Energy Co. retreated 2.1 percent. The northern province of Shanxi won’t approve any new coal mines before 2020, except to replace existing capacity, the Shanghai Securities News reported, citing the provincial government.

China may introduce a reform plan for state-owned enterprises by the middle of February, the China Securities Journal said. General guidelines and up to nine documents on deepening reforms of SOEs are expected to be released first, the report said, citing Peng Jianguo, vice director at State-Owned Assets Supervision and Administration Commission’s research center.

Citic Securities Co., the biggest listed brokerage, rose 2.9 percent. Annual net income jumped 115 percent to 11.3 billion yuan, according to a preliminary earnings statement to the Shanghai stock exchange, beating the average estimate of 9.1 billion yuan from 16 analysts.

— With assistance by Shidong Zhang

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