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Asia Markets
China Markets Plummet
From the Wall Street Journal of Tue, 09 Dec 2014 08:01:48 EST
Chinese yuan bank notes are seen in a vendor's cash box at a market in Beijing in this April 10, 2013 file photo.
Chinese yuan bank notes are seen in a vendor's cash box at a market in Beijing in this April 10, 2013 file photo. Reuters

SHANGHAI—China’s stocks, currency and corporate bonds suffered their largest tumbles in years Tuesday after Beijing took fresh steps to rein in growing risks in the country’s debt-laden financial system.

The bond market was the first to fall, which sent yields higher, after a regulator banned investors from using low-grade corporate debt as collateral to borrow cash. The turmoil then spread to the yuan, which recorded its biggest two-day tumble ever, while the benchmark Shanghai index slumped 5.4% to record its biggest fall since 2009.

The sudden moves serve as a reminder to global investors about the country’s shaky finances, just as China opens up its capital markets more to overseas cash. Adding to the gloom, policy makers gathering in Beijing this week for a key summit are widely expected to lower China’s economic growth target for next year after years of piling up debt to fuel fast expansion.

The slump in the stock market was especially stark, though not entirely unexpected, after it had surged recently to become the world’s top performing index. Retail investors had fueled the rally, with many using borrowed cash to leverage up their bets, contributing to the market’s wild swings in recent days and drawing warnings about the market’s instability.

“I was actually doing a presentation in my office during the last ten minutes of trading, when my boss asked to me to stop and asked everyone to look at stock prices. Then I saw the incredible fall of the Shanghai index and my stocks that have turned from black to red in just a few hours,” said Wu Yunfeng, a Shanghai-based retail investor.

The broad Tuesday selloff was triggered when China’s securities clearing house said late Monday it raised the threshold for corporate bonds qualifying as collateral for repurchase agreements, or repos, which are short-term loans with maturity spanning from overnight to 182 days. These are used as a key channel of short-term funding for bond investors.

“The new rule is to prevent risks from building up further as a result of high leverage in the market,” said Xu Hanfei, analyst at Guotai Jun’an. Mr. Xu added that the combined outstanding value of repos on the country’s two exchanges has surpassed 700 billion yuan (US$113.47 billion).

In its Monday statement, the country’s securities clearing house said the new rule also applies to bonds issued by local-government financing vehicles. They have taken on massive amounts of debt in recent years to fund infrastructure projects around the country, but are struggling to repay debt as fiscal revenue has slowed in the face of sluggish growth and a downturn in the property market.

The move to cut down on using riskier forms of debt is central to Beijing’s structural reforms aimed at sustaining economic growth over the long term by reducing reliance on state investment and exports and increasing the role of consumption. That policy shift, though, could hold back expansion in the short term if it chokes off credit to industries such as steel and cement, where problems with overcapacity are widespread.

The selloff came on the same day that China’s Central Economic Work Conference, which meets annually to set the country’s economic priorities, convened in Beijing for discussions that will include setting the government’s economic growth target for next year. Most economists expect China will miss this year’s target of 7.5% and that the work conference will set a lower target for 2015. A lower target would suggest that Beijing is less likely to take steps to spur growth—such as interest-rate cuts or increased spending—that often spur market rallies.

China’s leaders have been striving to make the country’s stock market more attractive after years of lousy performance with measures including a crackdown on insider trading, limiting the number of new share offerings, and most recently launching a stock trading link between Shanghai and Hong Kong.

Still, the rapid pace of the recent run-up is likely something policy makers don’t like to see, especially given the leverage in the market. The selloff Tuesday was the top topic of conversation in the financial corners of microblogging service Weibo, as retail investors watched gains accumulated over a few days disappear in an afternoon.

“The Chinese stock market is sick,” said one post from the eastern Chinese city of Linyi.

“It earned a lot in the morning, and it dropped deeply in the afternoon,” said another post on Weibo. “I don’t know why this stuff dropped, and I don’t know why it goes up either. There’s almost no logic.” The microblogger added, in reference in the Chinese territory where gambling is legal, “it isn’t as good as going to the casinos in Macau.”

The Securities Times—a Shenzhen newspaper supervised by the People’s Daily—quoted an unnamed local securities official who said a meeting with financial institutions was convened, revealing the regulator’s concerns about margin trading.

According to the China Securities Finance Corp., a government agency which publishes data on margin loans, at the end of November, shares worth 2.08 trillion yuan were being used as collateral to borrow from securities companies, up 2½ times from 843 billion yuan at the end of 2013. The volume accelerated particularly in October, increasing by 324 billion yuan.

—William Kazer, Anjani Trivedi and Dinny McMahon contributed to this article.

Write to Shen Hong at hong.shen@wsj.com



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