SHANGHAI, Jan 19 — Chinese equities plunged the most in six years, led by brokerages, after regulatory efforts to rein in record margin lending sparked concern that speculative traders will pull back from the world’s best-performing stock market.

The Shanghai Composite Index sank 7.1 per cent to 3,138.59 at 1.59pm local time, poised for the steepest drop since June 2008. Citic Securities Co and Haitong Securities Co, the nation’s two biggest listed securities firms, fell by the 10 per cent daily limit after they were suspended from lending money to new equity-trading clients. Industrial & Commercial Bank of China Ltd tumbled 9.7 per cent. The stock gauge’s 30-day volatility rose to a five-year high.

The penalties have raised concern that policy makers are trying to curb a surge in stock purchases using borrowed money, after outstanding margin loans surged to 1.08 trillion yuan (RM618.67b) as of Jan 13 from about 400 billion yuan at the end of June. The Shanghai Composite index has jumped 61 per cent during the past 12 months on record volumes as individual investors piled into the market.

“Regulators are concerned that shares have run too hard, too fast,” said Hao Hong, a strategist at Bocom International Holdings Co in Hong Kong. “They want a measured increase in the stock market. After all, margin financing is one of the reasons for people to be bullish on brokerage stocks, and these stocks have run particularly hard.”

The Shanghai measure advanced 2.8 per cent last week, a 10th week of gains that’s the longest winning streak since May 2007, after credit growth expanded and speculation grew the central bank will cut reserve-requirement ratios.

Margin suspensions

About seven shares fell for each that rose on the Shanghai stock gauge today, as an index of financial companies tumbled by a record. The Hang Seng China Enterprises Index of mainland shares traded in Hong Kong sank 5.2 per cent, while the Hang Seng Index fall 1.5 per cent.

Citic Securities, Haitong Securities and Guotai Junan Securities Co. were suspended from lending money and stocks to new clients for three months, the China Securities Regulatory Commission said on its microblog on Jan 16 after the market closed.

The regulator punished nine other brokerages for offences including allowing unqualified investors to open margin finance and securities lending accounts, it said. On the same day, the China Banking Regulatory Commission banned banks from lending to companies that borrow to invest in equities, bonds, futures and derivatives. So-called entrusted loans extended by banks increased to about 458 billion yuan in December, the most since data became available in 2012.

Record plunge

“China is trying to rein in over-bullishness in the stock market as moves have been exaggerated,” Pauline Dan, Hong Kong- based head of Greater China equities at Pictet Asset Management Ltd, said by phone. “Investors will have to wait and see until this volatility settles. They don’t have a fundamental reason to stay long since government policy is driving the market.”

The CSI 300 financial index tumbled 9.5 per cent, heading for a record loss, according to Bloomberg data going back to July 2007. Ping An Insurance Group Co, China Minsheng Banking Corp. and China Merchants Bank Co all fell by the daily limit. Other large-cap stocks also slumped, with PetroChina Co. falling 7.8 per cent and Agricultural Bank of China Ltd. dropping 9.9 per cent.

Minimum requirement

Citic said in a stock filing today that it raised the minimum requirement for opening margin lending accounts to 500,000 yuan from 300,000 yuan.

In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest from a broker. The loans are backed by the investors’ equity holdings, meaning that they may be forced to sell when prices fall to repay their debt. Huatai Securities advertised margin lending rates of 8.6 per cent on its website today.

Small-cap stocks are among the favourites of margin traders, Yu Liang, an analyst at Deutsche Bank AG, wrote in a Jan 5 report. Beijing-based Sumavision Technologies Co, which makes and sells digital TV software and hardware products, has US$238 million of shares bought on margin, or 17 per cent of its market capitalisation, according to the report. Xuzhou Combustion Control Technology Co has US$112 million or 23 per cent of the stock’s market value.

Other companies include Shanghai Duolun Industry Co and Zhejiang Jianfang Group Co, the Deutsche report shows.

Economic figures

China is scheduled to release data tomorrow that’s forecast to show the economy grew in the fourth quarter at the slowest quarterly pace since 2009.

The nation’s gross domestic product growth probably weakened to 7.2 per cent in the October-to-December period, according to the median estimate in a Bloomberg survey. The economy grew 7.3 per cent a quarter earlier. Economic expansion may reach 7.3 percent this year, the Xinhua News Agency reported over the weekend, citing central bank adviser Song Guoqing.

China Vanke Co and Poly Real Estate Group Co. slid more than nine percent. The nation’s new-home prices fell in 65 of the 70 cities monitored and were unchanged in four last month, the National Bureau of Statistics said in a statement yesterday. That compares with declines in 67 cities in November.

The Shanghai Composite is the best performer among 93 global indexes tracked by Bloomberg over the past year with a 67 per cent gain. The index was valued at 12.6 times 12-month projected earnings last week, the highest level since April 2011, according to data compiled by Bloomberg. — Bloomberg