Regulatory measures put stocks into a spin
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An investor checks share prices at a securities brokerage in Haikou, Hainan province, on Thursday. The benchmark Shanghai Composite Index lost more than 8 percent in the past three trading days. [Photo/China Daily] |
Efforts by the Chinese regulatory authorities to clamp down on alleged stock trading irregularities have dealt a serious blow to investor sentiment, triggering a sell-off that has sent the leading indicator down more than 8 percent over the past three days.
The benchmark Shanghai Composite Index dropped 2.8 percent on Thursday to close at 4,112.21 points, continuing a week-long losing streak.
Turnover on the bourse sank to 540.2 billion yuan ($87.1 billion) from 716.5 billion yuan the day before.
Many analysts attributed the latest setback to a "technical correction", effectively market language for profit taking.
They said the regulatory intervention had given many stock investors an excuse to take profits while others chose to stay on the sidelines, waiting for further monetary easing measures from the central bank.
The construction, power, insurance and airline sectors were the hardest hit.
Guodian Power Development Co Ltd dropped by the daily limit of 10 percent on Thursday before trading was suspended. China Life Insurance Co Ltd lost 6 percent.
The Hong Kong stock market fell in tandem with Shanghai, with the benchmark Hang Seng Index losing 1.27 percent on Thursday to 27,289.97. Turnover remained flat at HK$161.6 billion ($20.84 billion).
Analysts said that investor sentiment had been hit by the repeated warnings from the China Securities Regulatory Commission that it would take action to clamp down on excessive margin trading to cool down the overly heated market.
The China Securities Journal quoted sources as saying that the CSRC had begun to investigate the flow of capital from banks into the stock market through irregular channels.
Banking sources in Shanghai told China Daily they have stopped offering some personal loan products that they knew were used by borrowers to fund investments in stocks.
"We are aware that bank supervisors are sensitive about excessive leveraging in the stock market," said Nick Fu, a strategist with a Shanghai-based brokerage.
"It is no surprise that bank regulators are concerned about margin trading on borrowed funds, which has become a major source of market liquidity.
"But we don't believe the central bank will want to risk sending the market into a rout."
The CSI 300 Index, which tracks major shares in Shanghai and Shenzhen, has soared 34 percent in the past two months, and some analysts said the market needs a correction to continue rising in the long run.
Others suggested it is providing good opportunities for latecomers to get on the train, and they expected the central bank to announce another rate cut in the coming weeks that will inject new liquidity into the equity market.
"We maintain the view that the stock market will go up, with some volatility, during the second quarter as the monetary environment remains loose," said UBS Securities LLC in a research note on Wednesday.
"We have not noticed any fundamental change in the attitude of the supervisors to contain the market, although they are reminding us of risks.
"Secondly, there is no remarkable increase in share supply," the note said.
Nick Gardiner, a partner and managing director of Boston Consulting Group, predicted China will see a reduction in the speculative role of margin trading, with greater participation by long-term institutional investors.
He said there is a need to upgrade the risk management capability of securities firms, a precondition for them to expand the scale of their business using greater leverage.
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