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[SHANGHAI] Shanghai shares plunged more than five per cent on profit-taking on Tuesday, only a day after the benchmark composite index broke the 3,000 mark for the first time in more than three years.
The index closed down 5.43 per cent, or 163.99 points, at 2,856.27 on a record turnover of 793.4 billion yuan (US$128.2 billion). The drop was the biggest since August 31, 2009 when the index fell 6.74 per cent.
The Shenzhen Composite Index, which tracks stocks on China's second exchange, sank 4.31 per cent, or 63.26 points, to 1,403.39 on turnover of 450.5 billion yuan.
Chinese shares have surged in recent weeks, with the Shanghai index rising more than 20 per cent in the month to Monday's close, helped by a surprise interest rate cut on November 21.
The climb came despite signs of slowing economic growth, and was driven by expectations of further policy easing measures in response to more bad economic news.
But investors took profits Tuesday after authorities announced a new rule late Monday tightening the use of corporate bonds as collateral for short-term financing - a move analysts said will curb investors' ability to trade on margin.
"The rally was built on leverage, as many brokerages used bond financing to raise money and lend to their clients to trade stocks," BOC International analyst Shen Jun told AFP.
"The rule will have a big impact on brokerages' lending ability, so that's why we're seeing a pullback and a capital flight. The volatility is no big surprise," he added.
In a commentary Monday on the rising markets the official Xinhua news agency had warned: "For individual investors, who significantly outnumber institutional investors in domestic exchanges, greed now appears to triumph fear, with extraordinary, if not maniacal, numbers of new account openings and purchases that had not been seen for years.
"The problem with a momentum market, however, is that one can't tell when the tide will turn... the red-hot market is rocketing a bit too fast," it added.
Combined turnover reached a record 1.2 trillion yuan on Tuesday. The Shanghai volume was also an all-time high, analysts said.
Heavyweight financial plays that led earlier gains were hardest hit in Shanghai.
Sinolink Securities tumbled 9.87 per cent to 21.27 yuan, banking giant ICBC sank 9.29 per cent to 4.20 yuan and Ping An Insurance Group dived 8.50 per cent to 59.32 yuan.
Firms based in the southern port city of Xiamen bucked the trend on hopes for a new free-trade zone to be approved there.
In Shanghai, Xiamen XGMA Machinery surged 10 per cent to 7.00 yuan while Xiamen International Airport gained 2.54 per cent to 23.01 yuan.