China shares plunge 8% on margin trade curbs

China shares plunge 8% on margin trade curbs
An investor holds his head as he monitors stock prices at a brokerage house in Fuyang in central China's Anhui province Monday, Jan. 19, 2015.

Chinese shares plunged about 8% Monday after the country’s securities regulator imposed margin trading curbs on several major brokerages, a sign that authorities are trying to rein in the market’s big gains. It was China’s largest drop in six years.

Other markets in Asia and Europe were mostly higher. Markets in the U.S. Were closed for Martin Luther King Jr. Day.

The Shanghai Composite Index dived 7.7% to close at 3116.35, giving investors a wild ride after a year of surging prices despite slowing economic growth; at its nadir, the index was down 8.3%.

For the past three months, the index is still up 32%. Its dive rubbed off on Hong Kong where the Hang Seng was off 1.5% at 23,738.49.

In Europe, Germany’s DAX was up 1.1% and Britain’s FTSE 100 gained 0.6%. France’s CAC-40 rose 0.9%.

Japan’s Nikkei 225 rose 0.9% to 17,014.29 after a government report showed rising consumer confidence. South Korea’s Kospi gained 0.8% to 1902.62. Australia’s S&P/ASX 200 rose 0.2% to 5309.10. Shares were also higher in Taiwan, New Zealand and Southeast Asia.

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The China Securities Regulatory Commission imposed curbs late Friday on margin financing, or borrowing to purchase stocks, following an investigation of the industry. The three affected brokerages, Citic Securities, Haitong Securities and Guotai Junan, were forbidden to lend money and shares to new customers for three months after they allegedly were caught extending margin trading contracts in violation of the rules. The Shanghai Composite has surged almost 60% in the past year. Investors fear regulators believe prices have risen too much recently and might impose more curbs.

Dickie Wong, executive director of research at Kingston Securities in Hong Kong, said regulators want to tamp down some of the riskier financing practices underpinning the mainland Chinese stock market’s astonishing surge. With the rally “overdone,” regulators want to “simply give pause” to the brokerages, he said. “The recent bull market is mainly driven by margin financing.” Mainland Chinese regulators allowed margin financing and short selling only in recent years and Wong said many mainland investors may still be unaware of the risks involved.

Investors are awaiting China’s economic growth data due Tuesday, which is likely to show a further slowdown in the fourth quarter, and are also anticipating possible stimulus moves by the European Central Bank.

Markets generally settled down after volatility provoked by the Swiss central bank’s shock decision Thursday to untether the Swiss franc from the euro. Japan’s central bank is not expected to make any major moves in a policy meeting that wraps up Wednesday.

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