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[SHANGHAI] China will investigate nearly 50 securities firms for possible irregularities in margin trading, the official Xinhua news agency reported, a practice that has fuelled a spectacular stock market rally.
Market watchdog the China Securities Regulatory Commission (CSRC) will launch an "on-site inspection" of 46 brokerage firms that lend funds to investors to trade stocks, Xinhua said late on Wednesday.
The CSRC has not confirmed the move.
Earlier this month, China's benchmark Shanghai Composite Index crashed 7.7 per cent, its biggest one-day fall since June 2008, after the regulator announced it had punished 12 brokerages following an earlier inspection.
They were found to have violated rules including renewing expired margin trading contracts and letting unqualified customers trade on margin.
Margin trading - where investors trade mostly with borrowed money, heightening both risk and reward - has supported a liquidity-driven rally that sent the Shanghai index up more than 50 per cent in 2014.
Authorities fear that margin trading brings greater market volatility and could hurt small investors, according to analysts.
The outstanding balance of margin trading on the Shanghai stock exchange had reached 775.9 billion yuan (S$172.2 billion) as of Wednesday, data showed.
"A rapid influx of leveraged funds will not benefit the healthy development of the stock market, while there is a hidden risk in the rapid increase of the outstanding balance for margin trading," Xinhua said.
But in an apparent attempt to soothe investors, it quoted the CSRC as saying that the latest inspection should not be "over-interpreted" by the market.
Nonetheless, the Shanghai market was down 1.15 per cent by midday Thursday on the news, with brokerages leading the fall.