China Stocks Drop on Record Turnover as Margin Curbs Trump PBOC

China’s stocks fell from a seven-year high on record turnover as regulatory efforts to curb speculative trading overshadowed the central bank’s biggest cut to reserve requirements since 2008.

Citic Securities Co. and Haitong Securities Co. declined more than 4 percent after Chinese authorities banned a source of financing for margin trades. Trainmakers China CNR Corp. and CSR Corp. plunged at least 10 percent in Hong Kong, after soaring threefold over the past year. The Shanghai property index advanced 2.1 percent after the central bank reduced lenders’ reserve-requirement ratio by one percentage point and data showed home prices fell in fewer cities in March.

The Shanghai Composite Index dropped 1.6 percent to 4,217.08 at the close, while the Hang Seng China Enterprises Index in Kong Kong declined 2.9 percent. China’s securities regulator announced measures on Friday to clamp down on the use of shadow financing for equity purchases and increase the supply of shares available for short sellers. The Shanghai gauge trades at 21 times reported earnings, the highest since April 2010 and more than double last year’s low, according to data compiled by Bloomberg.

“The market is overdue for a correction,” said Francis Lun, chief executive officer of Hong Kong-based Geo Securities Ltd. “There’s profit taking for those stocks that rose recently.”

The CSI 300 Index slid 1.6 percent. The Hang Seng Index retreated 2 percent. The Bloomberg China-US Equity Index decreased 1.4 percent on Friday.

Excessive Gains

The Shanghai Composite has jumped 77 percent in the past six months, the most among 93 benchmark indexes globally, fueled by record leverage and speculation the government will lower borrowing costs to boost the nation’s economic growth.

While China bulls will draw some comfort from the central bank’s reserve-ratio cut, the selloff shows how vulnerable the Shanghai Composite is to a pullback after going 452 days without a 10 percent drop from a recent high.

“Chinese shares have risen too fast and it’s no surprise to see huge volatility in the market going forward,” said Castor Pang, the head of research at Core Pacific-Yamaichi in Hong Kong.

The Shanghai index’s trading volumes were 74 percent above the 30-day average, while its 100-day volatility jumped to a five-year high, according to data compiled by Bloomberg. The combined turnover on the Shanghai and Shenzhen stock exchanges climbed to a record 1.8 trillion yuan ($290 billion).

CSRC Crackdown

CSR and China CNR jumped more than 120 percent in Shanghai since the end of March through the noon-day break, taking their combined market capitalization to about $151 billion. That’s some $47 billion bigger than U.S. planemaker Boeing Co., whose 2014 revenue was almost triple that of the trainmakers combined.

The trainmakers are the best performers on China’s CSI 300 this year. Industrial companies are leading the advance as the ruling Communist Party promotes the sector’s overseas expansion through campaigns such as the “One Belt, One Road” strategy to form trade links across Asia and Europe.

In Shanghai, a gauge of financials slid 4.3 percent, the most among 10 industry groups on the CSI 300. Soochow Securities Co. plunged 9.5 percent, while Shanxi Securities Co. slumped the most since Jan. 19. Citic Securities, the biggest-listed brokerage, plunged 7 percent in Hong Kong, paring gains over the past year to 100 percent.

Regulators banned the margin-trading businesses of brokerages from using so-called umbrella trusts and allowed fund managers to lend shares to short sellers, statements on Friday showed.

Reserve Ratio

Investors have used umbrella trusts, which allow for more leverage than brokerage financing, to ramp up wagers on Chinese stocks after monetary stimulus sparked a world-beating rally in the nation’s benchmark equity gauge. Permitting mutual funds to lend their holdings to short sellers would make it easier for bearish traders to bet on a retreat.

Traders in Shanghai have borrowed a record 1.2 trillion yuan to buy equities via margin trades, while new investors have opened an unprecedented number of stock accounts this year.

Chinese investors have been piling into the equity market after the central bank cut interest rates twice since November and authorities from the China Securities Regulatory Commission to central bank Governor Zhou Xiaochuan endorsed the flow of funds into equities. The second reduction in reserve ratios this year comes after a report showed the slowest economic growth in six years and on signs capital is leaving China, causing a shortage of liquidity.

The reserve-ratio level will decline to 18.5 percent, still high by global standards, based on previous statements. The ratio will be reduced by another percentage point for rural financial institutions, two additional percentage points for Agricultural Development Bank and a further 0.5 percentage point for banks with a certain level of loans to agriculture and small enterprises.

The Shanghai property index gained the most among five industry groups. China State Construction Engineering Corp. jumped 9.1 percent. Home prices fell in fewer Chinese cities in March as demand got a boost from the removal of property curbs.

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