Margin curbs send Chinese equities plunging

Share prices on the Shanghai and Shenzhen stock exchanges plunged on Monday after the securities regulator rapped three major brokerages for continuing to lend money for stock purchases in violation of rules. As punishment for extending "margin trading" contracts, the brokerages cannot offer credit to new customers for three months.

What was the quantum of the fall?

At one point during the intraday trading, the Shanghai Composite Index declined by nearly 8.3 percent. It later trimmed that to end the day at a loss of 7.7 percent. Share prices of brokerages were hardest hit, with some falling by the daily limit of 10 percent.

Why did the capital market see such a steep decline?

Investors and analysts believe that the penalties imposed on the brokerages are a precursor to more curbs on credit-financed trading. The authorities are looking for ways to halt the boom in the stock market over fears that it could turn into a bubble and damage the broader economy. The index surged 54 percent last year, partly because of easy credit that investors used to finance their trading. Market sell-offs can also become self-reinforcing as other investors sell from fear that they will incur losses if they do nothing.

Why was the decline not reflected in other Asian markets?

Even though the fall was particularly steep, investors in other markets brushed it off as a situation peculiar to China. The government only allows limited foreign investment in mainland stocks and the country's financial system is largely walled off to the rest of the world. A bigger catalyst for markets will come on Tuesday when China reports fourth-quarter growth figures.

What are market experts saying?

"Margin financing is simply over-extended," said Dickie Wong, executive director of research at Kingston Securities Co. Regulators want to "simply give pause" to the brokerages. "In the past, mainland investors had no clue on margin financing and short selling, but after China introduced these two ways to trade stocks, people became so happy because they can borrow money and just go all in."