In China, thou shalt not engage in risky margin trading.
That’s the message from securities regulators in China after three brokerages were caught breaking margin trading rules. The firms have been barred from opening new margin trading accounts for three months.
Shares in Shanghai dropped 6% on Monday as investors reacted to the ruling. Shares of two affected brokers — Citic Securities and Haitong Securities — quickly lost 10%, the daily limit.
Deng Ge, a spokesman for the China Securities Regulatory Commission, said the brokers were caught rolling over margin trading accounts for a large number of clients “and had been warned,” according to Reuters.
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The crackdown is thought to be a reaction to an increase in margin trading that helped fuel the Shanghai Composite’s meteoric rise in recent months.
Margin accounts allow consumers to buy stocks with money borrowed from their brokerage, and can yield huge returns. They are also very risky, especially for retail investors.
It is not yet clear whether the ruling will blunt broader market enthusiasm. The Shanghai Composite has surged a jaw-dropping 54% over the past six months, and many analysts predict the index has even more room to run.
The exuberance is not supported by economic data — factory activity is dour, the real estate sector is shaky and GDP growth is expected to slow further this year to 7%, according to a CNNMoney survey of economists.
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