China shares plunge as regulators "prick stock market bubble"

SHANGHAI - Chinese stocks tumbled, led by brokerages, after regulators took measures to rein in margin trading at three of the nation's biggest securities firms.

The Shanghai Composite Index sank as much as 6 per cent to 3,175.16 at 9:36 a.m. local time. Citic Securities Co. and Haitong Securities Co., two of the brokerages targeted by regulators, slumped by the 10 per cent daily limit.

The penalties have raised concern that policy makers are trying to curb a surge in stock purchases using borrowed money, after outstanding margin loans jumped to 1.08 trillion yuan (S$230.92 billion) 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.

The nation's top two biggest listed securities firms 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 securities companies for offenses including allowing unqualified investors to open margin finance and securities lending accounts, it said.

"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 gauge 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.

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 slowed to 7.2 per cent in the October-to-December period, according to the median estimate of a Bloomberg survey. The economy grew 7.3 per cent a quarter earlier.

Economic expansion may reach 7.3 per cent this year, the Xinhua News Agency reported over the weekend, citing central bank adviser Song Guoqing.

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.