China: Stocks have biggest weekly loss in year on margin risk

[SHANGHAI] China's stocks fell for a fourth day, capping the biggest weekly decline in a year, amid concern regulatory scrutiny of margin lending and tepid economic growth will curb the benchmark index's world-beating rally.

China Life Insurance Co and China Pacific Insurance Co slid at least 5 per cent after Great Wisdom said regulators will check insurers' margin trading businesses. Leshi Internet Information & Technology Co dropped 4.8 per cent, paring this month's rally to 49 per cent. CSR Corp and China CNR Corp both lost 7.9 per cent after Huatai Securities Co said it would stop lending shares of the train makers for short-selling.

The Shanghai Composite Index fell 1.6 per cent to 3,210.36 at the close, extending this week's loss to 4.2 per cent, the most since December 2013. After a 37 per cent rally in the fourth quarter, the Shanghai index lost momentum this month as the government took efforts to cool the growth of margin loans. Turnover sank 64 per cent from its peak in December, while new equity account openings fell 44 per cent and purchases using borrowed money dropped 55 per cent.

"The market is facing pressure from both the regulators, who have been cracking down on fast fund inflows into equities, and profit taking after the rally," said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co. "Some investors are retreating after finding the market doesn't present too many investment opportunities at this stage." Smallcap Rally Hong Kong's Hang Seng China Enterprises Index dropped 0.1 per cent at 3:29 pm, paring this month's loss to 1.9 per cent. The CSI 300 Index slipped 1.4 per cent and the Hang Seng Index fell 0.4 per cent. The Bloomberg China-US Equity Index, the measure of the most-traded US-listed Chinese companies, added 0.3 per cent in New York yesterday.

The Shanghai measure slid 0.8 percent this month, compared with a 14 per cent rally for the small-cap ChiNext Index. Small caps benefited from a rotation into technology and drug companies as regulators' crackdown on margin trading damped buying of large caps.

Margin traders increased holdings of shares purchased with borrowed money for a seventh day yesterday, with the outstanding balance of margin debt on the Shanghai Stock Exchange rising to 777.6 billion yuan (US$124.5 billion).

A gauge of financial shares in the CSI 300 fell 1.1 per cent, extending a slump to 7.7 per cent this month, the biggest loss among 10 industry groups. Ping An Insurance (Group) Co., China's second-biggest insurer, dropped 1.8 percent. Shenwan Hongyuan Group Co. lost 4.3 percent while Huatai Securities retreated 3.5 percent.

Margin Probe The China Insurance Regulatory Commission will check insurers' participation in the margin trading and short-selling businesses, Great Wisdom reported, citing unidentified officials at insurance asset management companies. The start date of the check hasn't been announced yet, it said.

The Shanghai Composite sank the most since 2008 on Jan. 19 after regulators suspended three of the nation's biggest brokerages from adding new margin accounts and told securities firms to stop lending to traders with less than 500,000 yuan.

The Shanghai index is still the best performer among 93 global indexes tracked by Bloomberg over the past year with a 58 per cent gain. It's valued at 12 times 12-month projected earnings, compared with the five-year average of 10.3, according to data compiled by Bloomberg. Trading volumes were 35 per cent lower than the 30-day average today.

The statistics bureau is due to release the official manufacturing index on February 1. The gauge, known as the Purchasing Managers' Index, probably rose to 50.2 in January from 50.1 in December, according to the median estimate of a Bloomberg survey of 16 analysts. China's gross domestic product rose 7.4 per cent in 2014, the slowest full-year pace in 24 years, as a slump in commodity prices and a property downturn weighed on the economy.

Both CSR and China CNR plunged the most since July 2011. The two companies have each doubled since announcing a plan to merge in December. Huatai Securities asked clients who owe shares to pay them back within three trading days or the brokerage held the right to close out positions, according to a statement on its website Thursday.

Flat-panel television maker Hisense Electric Co. gained 10 per cent after the China Securities Journal said it will ally with Tencent on smart TV games. Tencent declined 2.2 per cent in Hong Kong.

A gauge of technology companies in the CSI 300 jumped 16 per cent this month, the most among 10 industry groups. DHC Software Co. surged 35 per cent. Leshi Internet, which rose to a record on January 27, led gains for ChiNext companies in January.

BLOOMBERG