SHANGHAI • Chinese shares sank more than 5 per cent yesterday in their biggest drop since this summer's rout after the stock regulator 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. Citic Securities and Guosen Securities plunged by the daily limit in Shanghai after saying they were under probe for alleged rule violations.
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.
"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 sources said on Thursday the regulator is urging brokerages to cease financing clients' stock purchases through swaps and other over-the-counter contracts, a move aimed at curbing leveraged trading.
"The move towards deleveraging is certainly having a negative impact on investor sentiment," said Mr Shen Weizheng, a fund manager at Shanghai-based Ivy Capital.
Earlier selling pressure intensified late in the stock-trading session, pushing the blue-chip CSI300 index down 5.4 per cent and the Shanghai Composite Index 5.5 per cent lower in their biggest one-day percentage loss since late August, the depth of the summer rout.
The flagship indexes also posted their worst weekly performance since August, losing over 5 per cent.
Market sentiment had already been fragile as investors braced themselves for a fresh batch of initial public offerings (IPOs) that will kick off next week, and are cautious ahead of a possible US rate increase next month.
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. The authorities are testing the strength of a nascent bull market by lifting a freeze on IPOs and scrapping a rule requiring brokerages to hold net long positions, just as the earliest indicators for this month signal a deterioration in economic growth.
A Chinese fertiliser maker and a pig iron producer became the latest companies to flag debt troubles after at least six defaults this year.
China's economy is still showing a muted response to waves of monetary and fiscal easing as of the half-way mark for the last quarter of the year, some of the earliest indicators suggest. REUTERS