Regulatory measures put stocks into a spin

An investor checks share prices at a securities brokerage in Haikou, Hainan province, on Thursday. The benchmark Shanghai Composite Index lost more than 8 percent in the past three trading days. [Photo/China Daily]

Efforts by the Chinese regulatory authorities to clamp down on alleged stock trading irregularities have dealt a serious blow to investor sentiment, triggering a sell-off that has sent the leading indicator down more than 8 percent over the past three days.

The benchmark Shanghai Composite Index dropped 2.8 percent on Thursday to close at 4,112.21 points, continuing a week-long losing streak.

Turnover on the bourse sank to 540.2 billion yuan ($87.1 billion) from 716.5 billion yuan the day before.

Many analysts attributed the latest setback to a "technical correction", effectively market language for profit taking.

They said the regulatory intervention had given many stock investors an excuse to take profits while others chose to stay on the sidelines, waiting for further monetary easing measures from the central bank.

The construction, power, insurance and airline sectors were the hardest hit.

Guodian Power Development Co Ltd dropped by the daily limit of 10 percent on Thursday before trading was suspended. China Life Insurance Co Ltd lost 6 percent.

The Hong Kong stock market fell in tandem with Shanghai, with the benchmark Hang Seng Index losing 1.27 percent on Thursday to 27,289.97. Turnover remained flat at HK$161.6 billion ($20.84 billion).

Analysts said that investor sentiment had been hit by the repeated warnings from the China Securities Regulatory Commission that it would take action to clamp down on excessive margin trading to cool down the overly heated market.

The China Securities Journal quoted sources as saying that the CSRC had begun to investigate the flow of capital from banks into the stock market through irregular channels.

Banking sources in Shanghai told China Daily they have stopped offering some personal loan products that they knew were used by borrowers to fund investments in stocks.

"We are aware that bank supervisors are sensitive about excessive leveraging in the stock market," said Nick Fu, a strategist with a Shanghai-based brokerage.

"It is no surprise that bank regulators are concerned about margin trading on borrowed funds, which has become a major source of market liquidity.

"But we don't believe the central bank will want to risk sending the market into a rout."