China stocks tumble most since summer slump as brokerage probe widens

SHANGHAI - Chinese shares sank more than 5 percent on Friday in their biggest drop since this summer's rout after Reuters reported the stock regulator had widened its probe on brokerages to include the country's fourth-biggest securities firm.

The sharp drop in afternoon trade highlights the volatility of China's markets ahead of an expected decision by the International Monetary Fund (IMF) on Monday on whether to include the yuan currency in its global reserve basket.

China Haitong Securities is under investigation by the China Securities Regulatory Commission (CSRC), two people with direct knowledge of the matter told Reuters, following similar probes into two other domestic brokers.

The brokerage later confirmed the news, saying in a statement published on the Shanghai stock exchange that it is being probed for possible violation of securities regulations.

Little has emerged as to the specific reasons for the probes, but 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.

"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.

Markets had already been jittery after Reuters reported that the regulator is urging brokerages to cease financing clients' stocks purchases through swaps and other over-the-counter contracts, a move aimed a curbing leveraged trading.

"The move towards deleveraging is certainly having a negative impact on investor sentiment," said Shen Weizheng, fund manage at Shanghai-based Ivy Capital.

At a weekly news conference in Beijing on Friday, the securities regulator confirmed that it has ordered securities firms not to finance securities trading by clients using over-the-counter derivatives.

The CSRC probe into Haitong come on the heels of investigations into CITIC Securities and Guosen Securities, two bigger rival firms.

Sliding market

Earlier selling pressure intensified late in the stock trading session, pushing the blue-chip CSI300 index down 5.4 percent and the Shanghai Composite Index 5.5 percent lower in their biggest one-day percentage loss since the nadir of the summer rout in late August.

The flagship indexes also posted their worst weekly performance since August, losing over 5 percent.

Market sentiment was already fragile as investors braced for a fresh batch of initial public offerings next week, and are cautious ahead of a possible US interest rate increase next month that would be the first in around a decade.

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.

Haitong, along with Guotai Junan Securities, is also being probed by anti-corruption investigators, the official Xinhua news agency reported on Tuesday.

In September, Haitong was fined 86 million yuan ($13.5 million) by the regulator for breaching securities rules.

In August, state media reported that a CSRC official and four senior executives from CITIC Securities had confessed to insider dealing.

The yuan softened to a three-month low against the dollar on Friday and was set for its longest weekly losing streak in five months ahead of the IMF's decision next week.

Some traders expect Beijing may allow the currency to depreciate after it is included in the IMF's Special Drawing Rights basket, partly to reflect China's slowing economic growth. — Reuters

Operation to steady China stocks a success, but patient comatose

SHANGHAI/HONG KONG - Tough medicine for China's ailing stock markets has brought stability to prices, at least for now, but it has come at a cost; equities and futures are trading so thinly that they are in danger of flat lining.

Intraday volumes on key onshore equity markets fell and stock futures turnover all but evaporated this week, after exchanges proposed a "circuit breaker" to limit index swings and China altered dividend taxes to favor long term investors.

The moves were welcomed by some, but the sharp drop in volumes also underlined how many investors have lost confidence in Beijing's ability to manage the turmoil that saw stocks slide over 40 percent since June.

Under the country's old economic model, that may not have mattered so much: bank lending for infrastructure projects and manufacturing was what kept the economic engine running.

Now China wants to modernize its economy, favoring nimbler, high-tech companies that need equally nimble, modern financial markets to finance them. Comatose stock and futures markets would represent a major blow to its ambitions.

Wang Feng, a fund manager and CEO of Alpha Squared Capital, is considering joining the mass exodus from Chinese equities.

He told Reuters he was looking into investing in commodities futures as an alternative to stock index futures. Some of his peers in the high-frequency trading community were cancelling plans to come to China altogether.

Wang blamed a series of attempts in recent weeks by regulators to curb excessive speculation for taking the life out of the market.

"The joke now is that the market is a vegetative patient."

Others are shifting their strategies to offshore futures contracts tracking China-based ETFs, like the iShares A50 , Wang added.

Qiu Zhi, a strategist at Huatai Securities Co, said he was seeing rising inquiries from Chinese investors to open accounts to trade index futures in Hong Kong.

"The rules of the game are more consistent in Hong Kong."

Rewriting the rules

China has busily rewritten the rules in recent weeks, and there has been no let up in policy changes and intervention aimed at shoring up markets and staving off full-blown panic.

Adding to authorities' crackdown on derivatives trade, focused mainly on sellers, the exchanges proposed this week to add a "circuit breaker" to the benchmark CSI300 index that would suspend trade if it moved up or down over 5 percent in a day.

While it appears to have convinced some investors to stop selling shares, it may also have convinced people not to buy.

Volumes on the Shanghai Composite Index are down more than 40 percent following Monday's announcement of the circuit breaker plan, and on Tuesday they were at their lowest since February, a month in which trade typically dives due to the Lunar New Year holiday week.


Traders suspect much of the remaining business comes from the government's so-called "national team" of investors who sweep in to push indexes up near the end of a day, resulting in sudden rises by the close that are hard to explain otherwise.

Once-active index futures markets have seen volumes vaporize; trade in the benchmark CSI300 index future contract collapsed this week, with transactions falling from around 600,000 on Friday to less than 23,000 on Tuesday.

That compares with a peak of 2.43 million in late August and comes after China raised margin requirements on some stock index futures trading.


The risk for China is a stable but illiquid stock market, meaning securities regulators will struggle to re-open the suspended IPO market.

As long as share issues remain suspended, the stock market will not serve as a viable fundraising alternative to bank loans for the rapidly expanding companies that Beijing wants to lead its economy in the long term.


Looking for the exit

Retail investors who dominate Chinese stock markets have consistently said they want to exit as soon as they can do so at minimal loss.

The sliding volumes highlight their retreat, in a blow to Beijing's vision of a society that can invest safely and profit from the country's expanding and increasingly dynamic economy.

Institutional investors say they have been put off by heavy-handed pressure from Beijing to buy and hold shares, and in an environment in which fund managers are being questioned by authorities about their strategies, it is increasingly seen as safer not to trade at all.

"We are staying out of shares at the moment," said a hedge fund manager focused on China consumer plays based in Hong Kong.

Declining investor interest in stocks was predicted by many analysts and economists, who warned that attempts to lure buyers into the market by suppressing sellers would backfire.

"Time and again, we have seen countries trying to introduce measures to support their stock markets, but the only thing that has worked in the long term is to let markets clear themselves," said Dominic Rossi, global chief investment officer of equities at Fidelity Worldwide Management, which manages $290 billion in assets globally.

"China should do the same." — Reuters