China’s stocks tumble 5.5% in worst fall since August yuan devaluation

SHANGHAI — Chinese shares plunged yesterday in their biggest daily decline since this summer’s rout, dragging down other Asian stock markets, as a fresh regulatory crackdown on brokerages and falling industrial profits in the world’s second largest economy weighed on sentiment.

The Shanghai Composite Index tumbled 5.5 per cent, the worst since August, when volatility spiked following a shock yuan devaluation, to close at 3,436.30. Among Asia’s other key bourses, Hong Kong’s Hang Seng Index lost 1.9 per cent, Japan’s Nikkei-225 Index fell 0.3 per cent, while Singapore’s Straits Times Index shed 0.9 per cent.

The sharp drop in Chinese stocks highlights the volatility of the country’s markets and comes ahead of an expected decision by the International Monetary Fund next Monday on whether to include the yuan in its global reserve basket.

CITIC Securities, China’s biggest brokerage, and smaller rival Guosen Securities said in separate filings on the Shanghai and Shenzhen stock exchanges that the China Securities Regulatory Commission (CSRC) had launched an investigation into alleged violations of securities supervision and management regulations. The brokerages said they would cooperate fully with the investigations, and that there was no impact on their current operations.

China Haitong Securities is also under investigation by the CSRC for alleged violations of securities regulations, two people with knowledge of the matter told Reuters, declining to be identified because they were not authorised to speak to the media.

Little has emerged as to the specific reasons for the probes, but Mr Gu Yongtao, an analyst at Cinda Securities, said the regulator could be trying to get a better grip on leveraged trading after a near full-blown market crash a few months ago. After the stock market slump began in mid-June, Beijing launched a massive and unprecedented rescue effort and began cracking down on insider trading and short-selling, which it said were partly to blame for volatility.

“We think the purpose of the probes is to bring all businesses related to stock financing to the table so that regulators can have a clear picture of the leverage situation,” he said, adding it is likely an extension of an ongoing clean-up in illegal margin trading.

Investors were also taken aback yesterday by news that the CSRC had urged brokerages to cease financing clients’ stocks purchases through over-the-counter swap contracts, the government’s latest step to reduce leverage. “The move towards deleveraging is certainly having a negative impact on investor sentiment,” said Mr Shen Weizheng, fund manager at Shanghai-based Ivy Capital.

Adding to the mix of bearish factors yesterday was news that profits earned by Chinese industrial companies fell 4.6 per cent last month from October a year earlier, declining for the fifth consecutive month amid a slowing economy and persistent overcapacity. Market sentiment had already been fragile as investors braced for a fresh batch of initial public offerings that will kick off next week, as well as a likely United States rate hike next month. AGENCIES