Stock prices are displayed on an electronic ticker and an electronic board near signage for the Shenzhen-Hong Kong Stock Connect at the Hong Kong Stock Exchange in Hong Kong, China (Photographer: David Paul Morris/Bloomberg)

China Stocks Sink Most in Four Months Amid Leverage Crackdown

(Bloomberg) -- A selloff in Chinese stocks deepened, with the benchmark gauge slumping the most in four months, amid concern authorities will step up measures to crack down on leveraged trading.

The Shanghai Composite Index fell 1.4 percent at the close, the biggest one-day loss since Dec. 12. Industrial companies and material producers led losses. The ChiNext small-cap gauge slipped 1.6 percent to 1,809.91, its lowest closing level since September 2015.

China’s authorities are taking advantage of a strengthening economy to reduce financial-system risk by tightening the screws on leverage. The banking regulator said late Friday it will strengthen a crackdown on irregularities in the financial sector, echoing comments by the securities watchdog just days earlier, while the top insurance official is being investigated on suspicion of “severe” disciplinary violations. The Shanghai Composite has slumped almost 5 percent since closing at a 15-month high on April 11, the biggest loss among global gauges.

"Market sentiment has been damped by recent tightening supervision on all fronts such as the banking commission, insurance commission, securities regulator," said Ben Kwong, executive director of KGI Asia Ltd. in Hong Kong. "They expressed concern about bubbles and credit defaults. The deleveraging process is still in progress."

China Stocks Sink Most in Four Months Amid Leverage Crackdown

The declines dented optimism in Hong Kong, where the Hang Seng Index rose 0.4 percent, paring an earlier gain of as much as 0.7 percent that had come amid global risk appetite on bets that pro-growth centrist Emmanuel Macron will be France’s next president. The Hang Seng China Enterprises Index climbed 0.6 percent at the close, trimming an advance of 1.1 percent.

China is likely to take more deleveraging measures, the Financial News said in a front-page commentary. The banking regulator has ordered local units to assess cross-guaranteed loans, according to a Caixin report.

Traders were watching to see whether the Shanghai gauge would pare losses to less than 1 percent by the close, as had been the pattern recently. The index had gone more than 80 trading days without a loss of more than 1 percent on a closing basis, the longest stretch since the market’s infancy in 1992.

"Investors had expected officials to give some kind of signal to soothe the market after the big falls earlier last week, but their hope came to naught, with regulators saying over the weekend that they want to continue tightening,” said Chen Yalong, an analyst in Shanghai at Northeast Securities Co.

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