Bourses continue correction on expectations of stricter rules

Equities slumped on Wednesday in the Chinese mainland despite the rebound of the United States' market, with analysts saying that the domestic financial clampdown and deleveraging efforts could be driving the selling.

The stock markets in Shanghai and Shenzhen saw a short-lived rally in early morning trading, before the rebound faltered in the afternoon with a sharp decline in banking and property companies' share prices.

The benchmark Shanghai Composite Index was down by 1.82 percent to 3309.26 points at the close, while the Shenzhen Component Index dropped by 1.26 percent to 10246.97 points. The ChiNext Index, which tracks startup stocks in Shenzhen, managed to recover some of its losses on Wednesday, gaining 1.14 percent after hitting a three-year low in the previous day.

In addition to the spillover effect of the US market plunge, analysts said that China's A-share market might continue to be haunted by the imminent release of a sweeping new regulation. The central bank, in collaboration with the country's banking, securities and insurance regulators, is set to roll out new rules to curb risks in the country's $15 trillion asset management sector and to rein in risky shadow banking activity.

The new regulation is likely to be announced in March ahead of the annual legislative meeting, according to Chinese media reports.

"The Chinese government has made financial deleveraging one of its key tasks this year, reflecting the Chinese authorities' pre-emptive stance to guard against risks caused by external uncertainties by controlling domestic risks first," said Steven Zhang, chief economist at Morgan Stanley Huaxin Securities Co Ltd.

While the transition period for the new regulation could be extended, investors might still be concerned that the tougher regulatory stance toward the shadow banking sector and risky leveraged trading could prompt financial institutions to sell stocks in the public market in compliance with the new regulation.

Hong Hao, chief strategist at BOCOM International Holdings Co Ltd, said that China's A-share market faces its own challenges, while in the near term, market sentiment could be weighed down by the US market plunge. He added that the exit of northbound overseas capital from the A-share market through trading links between the mainland and Hong Kong could be another driver behind the selling.

Despite the sharp corrections over the past few days, some analysts remained bullish on the long-term prospects of the Chinese stock market.

Analysts at China International Capital Corp Ltd said in a research note that A-share valuations could be more attractive after the latest correction and the stock prices will likely be supported by the listed companies' earnings improvements.