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China Shares Fall Sharply as Regulators Investigate Brokers
Chinese officials have ramped up scrutiny of the securities industry
By CHAO DENG
Updated Nov. 27, 2015 4:17 a.m. ET
China shares fell 5.5% Friday, the biggest daily slide since August, as authorities intensify their crackdown on the securities industry.
The market’s swift fall signals officials’ efforts to snuff out trading practices they deem suspicious or volatile is backfiring. Investors struggling to predict Beijing’s next move, and who might be affected, instead have opted to sell their shares.
Investigations into three major Chinese brokerages over suspected securities violations triggered Friday’s steep losses, sending the index to 3436.30. The declines, which amount to the biggest daily percentage loss since Aug. 18, wiped out most of Shanghai’s gains this month and pushed the index down 38% from its June peak.
Hong Kong’s Hang Seng Index fell 1.9% on Friday and 3% for the week.
“Investors have concerns about who will be the next [brokerage]” targeted by authorities said Wong Chi-man, head of research at China Galaxy International Securities. “With limited information, investors are finding it difficult to quantify the impact, therefore some investors may just trim their position and stay on the sidelines.”
Regulators’ attempts to stamp out market volatility appear to stand in contrast with Beijing’s recent announcement of plans to relaunch initial public offerings by the end of the year. Many interpreted that move as a vote of confidence in the stock market’s recovery. China’s shares entered a bull market, defined as a rise of 20% from a recent low, earlier this month.
The benchmark is still up 1.6% month-to-date, and up 14% from its August low. But, it remains down 38% from a June peak.
China’s largest stock broker, Citic Securities Co., Guosen SecuritiesChina’s, third-largest broker by assets, and Haitong Securities Co. each said they would cooperate with the country’s stock regulator in investigations for suspected violations of securities rules. Citic and Guosen made their announcements to the stock exchange on Thursday, while Haitong announced late Friday.
Citic fell by the 10% limit allowed by regulators in Shanghai and shed 4.9% in Hong Kong. The stock is down 12.8% in Shanghai and 7.5% in Hong Kong this week.
Guosen was also down at the 10% daily limit in Shenzhen on Friday, off 6.4% for the week.
A weaker yen helped lift Japan shares this week. PHOTO: AGENCE FRANCE-PRESSE/GETTY IMAGES
Shares of Haitong Securities fell 3.8% in Hong Kong, before the brokerage issued a trading halt after the market opened without citing reasons. Analysts say that they suspect authorities are investigating Haitong as well.
China’s regulators have stepped up scrutiny of the securities industry, extending a crackdown on trading after shares fell more than 40% from peak to trough this summer. Authorities have targeted “malicious” short sellers, arrested star fund managers and clamped down on the practice of borrowing to buy stocks.
Earlier this week, antigraft authorities inspected more than a dozen Shanghai-based enterprises and Citic announced that it had overstated certain financial transactions during a period of extreme volatility for the country’s stock market in the spring and summer.
Those transactions were mostly related to its over-the-counter swaps business, which allow traders to bet on various market movements at once and are difficult to track because they are traded privately.
Analysts say officials’ moves aim to drain leverage and speculation from the market. Investors who borrowed heavily to buy shares fed a yearlong rally through June, though the unwinding of those loans also accelerated losses over the summer.
Yet “each time the regulator moved to deleverage the market, the Shanghai index takes a dive,” said Zhang Gang, an analyst at Central China Securities.
A two-month rebound in margin loans has stalled recently with loans reaching 1.22 trillion yuan (190.94 billion dollars) as of Thursday, according to Wind Information Co.
Loans fell below 1 trillion yuan in late September, when the market’s fall forced the unwinding of bets by brokerages.
The outstanding balance of equity swaps totaled 122 billion as of the end of October, down over 25% from the previous peak of 164 billion as of the end of May, according to HSBC. Citic, the firm estimates, has the largest exposure.
Elsewhere, Japan shares fell 0.3% Friday after the Nikkei neared the 20000 level on Thursday. Australia’s S&P/ASX 200 fell 0.2% and South Korea’s Kospi slipped 0.1%.
Brent crude was last down 0.2% at 45.38 dollars a barrel. U.S. oil prices fell 0.4% on Thursday amid signs of robust U.S. production despite data showing a lower-than-expected increase in U.S. oil inventories and a decline in the number of working oil-rigs in the country.
Gold prices were down 0.3% at 1,066.70 dollars a troy ounce.
—Jacky Wong and Yifan Xie contributed to this article.
Write to Chao Deng at Chao.Deng@wsj.com
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