Most China stocks drop as small caps retreat

Hong Kong - Most Chinese stocks dropped, with a gauge of smaller companies extending its steepest loss in six weeks, on concern the regulator will restrict investments in the equity market.

The ChiNext Index of smaller companies fell 1.2% at 07:23. Shanghai New Culture Media sank by the daily limit to lead losses on the 100-member gauge. The Shanghai Composite Index slipped 0.2%, with more than three shares declining for every two that advanced, while a measure of Chinese shares traded in Hong Kong retreated 0.7%.

The China Banking Regulatory Commission is said to be planning a crackdown on the $3.5trn WMP market. The initial draft states that cash from “mass market” wealth products can only be invested in money or bond markets, and not in domestically listed shares, said a person with direct knowledge of the matter.

Concern was fueled also by a Xinhua News Agency report on Tuesday that said the nation will curb asset bubbles. It was citing a government statement after a Politburo meeting chaired by President Xi Jinping.

“The market is more sensitive now,” said Banny Lam, Hong Kong-based head of research at CEB International Investment Corp. “After the dive yesterday, there wasn’t a strong recovery this morning, so the market became worried. It seems like generally regulation is becoming stricter, which can affect market sentiment.”

Leverage curbs

China’s securities regulator has already restricted the use of leverage by structured asset management plans, and was said to warn brokerages to do better due diligence when raising money for companies. The Shenzhen Stock Exchange will demand better disclosure and limit speculation on stocks in popular industries such as virtual reality and artificial intelligence, according to a statement in the Securities Daily on Tuesday.

Authorities including the CBRC have noticed that bursting of bubbles in the property, securities investment and commodity sectors may worsen bad loans and even affect the stability of the banking system, the 21st Century Business Herald reported, citing a person close to regulators.

China has been tightening rules on WMPs since late 2014. The products are a key reason behind the growth in the shadow-banking industry, which Moody’s Investors Service estimates is worth more than 50 trillion yuan, and have been used by some financial institutions as a way to extend funds to risky borrowers and evade capital requirements. WMPs are sold by banks but often stay off their balance sheets.

Markets down

The Shanghai Composite traded at 2 987.44. The benchmark fell 1.9% on Wednesday, the most since June 13. The Hang Seng China Enterprise Index of mainland companies retreated to 9 048.66 in Hong Kong, while the Hang Seng Index was down 0.4%.

Shanghai New Culture dropped by the 10% limit on the ChiNext index, the most since August.

China Life Insurance and Ping An Insurance  of China slipped at least 1% in Shanghai after the industry regulator said local insurers’ profits fell more than 54% in the first half because of a stock market decline and higher expenses. China Petroleum & Chemical retreated 0.8% as crude oil prices traded near a three-month low.

“Sentiment remains fragile as the market awaits more regulatory measures on WMPs,” said Castor Pang, head of research at Core-Pacific Yamaichi Hong Kong. “Investors need to sell before deleveraging takes place to affect the stock market. ChiNext shares are vulnerable as WMPs invest in some of high-risk high return assets.”

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