China’s Stocks Plunge in Volatile Trading as Margin Debt Drops

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China’s stocks slumped in volatile trading, led by technology companies, after traders sold shares purchased with borrowed money for a third day.

The Shanghai Composite Index slid as much as 4.4 percent in the last hour of trading, sending a gauge of 30-day volatility to a seven-year high. All 10 industry groups in the CSI 300 Index dropped, with a sub-index of technology companies plunging 6.3 percent for the biggest loss. Beijing Shiji Information Technology Co. and Hundsun Technologies Inc. both fell by the 10 percent daily limit.

The Shanghai Composite tumbled 3.5 percent to 4,527.78 at the close, erasing a gain of 0.7 percent and snapping a two-day, 4.7 percent advance. The gauge posted its biggest loss since the global financial crisis last week on concern valuations had risen to unsustainable levels and a flood of initial public offerings were sucking funds from existing equities.

“The market is still in a correction mode,” Dai Ming, a fund manager at Hengsheng Asset Management Co., said in Shanghai. “Some investors have pretty high leverage and they need to cut their positions.”

Margin traders reduced holdings of shares purchased with borrowed money for a third day on Wednesday, with the outstanding balance of margin debt on the Shanghai Stock Exchange falling by 2 percent to 1.44 trillion yuan ($231.9 billion). That’s the longest stretch of losses in four months.

Rate Speculation

The CSI 300 Index slumped 3.6 percent. Hong Kong’s Hang Seng China Enterprises Index fell 1.6 percent, while the Hang Seng Index dropped 1 percent.

The Shanghai gauge has surged 124 percent in the past year on a record jump in margin debt and bets the government will lower borrowing costs. The measure is valued at 17 times 12-month projected earnings, down from a five-year high of 19.5 set this month, according to data compiled by Bloomberg. Trading volumes were 2.7 percent lower than the 30-day average.

China’s stocks also fell Thursday amid concern the central bank won’t reduce interest rates or reserve-requirement ratios as had been speculated, Shen Zhenyang, analyst at Northeast Securities Co. said in Shanghai. The People’s Bank of China is unlikely to cut rates and reserve ratios this month, the Financial News reported Thursday.

The PBOC added funds to the banking system using open-market operations for the first time in two months on Thursday. The move was made to keep borrowing costs from climbing as banks hoard funds to meet quarter-end regulatory requirements. Money rates have risen every June over the past decade, with this month’s increase set to be the biggest of the year.

IPO Pressure

“Earlier expectations towards cuts in interest rates and reserve requirement ratios have fallen apart after China resorted to fine-tuning measures to loosen monetary policy,” Shen said by phone. “New IPO approvals increased share supply pressure. The decline today after a short-term rebound earlier shows that the medium-term consolidation in the stock market is still going on.”

The China Securities Regulatory Commission gave written IPO approval to 28 companies, it said in a statement on its microblog on Wednesday. Ten companies will list on the Shanghai Stock Exchange and 18 on the Shenzhen bourse, it said. Five companies including Guotai Junan Securities Co. will start trading on Friday.

The rally in Chinese technology companies is reversing at the fastest pace in at least a year on concern valuations are too high relative to earnings growth. The CSI 300 Information Technology Index has slumped 19 percent from its June 2 record, almost three times the loss by the broader gauge. Even after the declines, the hi-tech measure trades at 74 times earnings, versus 31 times for the Nasdaq Composite Index in the U.S.

Beijing Shiji tumbled 10 percent Thursday. The stock still trades at more than 100 times earnings even after losing 31 percent since June 2. Leshi Internet Information & Technology (Beijing) Co. dropped 7.9 percent, paring its gain this year to 251 percent.