Chinese Stocks: Brokerage Probes Weigh on November Stock Gains 

Three of China’s largest brokerages said they were under investigation for suspected violations of margin-trading rules

A widening Chinese investigation into what officials have deemed suspicious or illegal trading activity has put the brakes on a rebound in the Shanghai Composite Index, wiping out much of the market’s November gains.

The index closed up 0.3% at 3445.40 on Monday, after tumbling 5.5% Friday, its largest daily percentage decline since Aug. 18.

It is up just 1.9% in November and 16% from its Aug. 26 bottom. Earlier this month, the benchmark had risen more than 20% from its August low, putting it in bull-market territory. It gained 10.8% in October.

On Sunday, three of China’s largest brokerages said they were being probed by the country’s securities regulator for suspected rules violations related to the signing of margin-trading contracts with customers. The practice of borrowing to buy stocks amplified the Shanghai market’s gains into June and losses during this summer’s rout.

The brokerages, Citic Securities Co., Haitong Securities Co. and Guosen Securities Co., revealed last week they were under investigation, but they didn’t provide a reason.

News of the probes triggered heavy selling in China on Friday, leaving shares of some of the brokerages, including Citic Securities, down by their daily trading limit of 10%.

While China’s market has had a relatively steady recovery from the summer, official efforts to weed out the crash’s causes are threatening to throw off shares again. The government investigation has already ensnared star fund-managers and top brokerage executives, which has sent a chill through Chinese financial markets.

The Shanghai Composite was down as much as 3.2% intraday Monday. Citic closed down 1.5% in Shanghai, while Haitong was down 8.9% in Shanghai and Guosen shed 2.8% in Shenzhen.

“We could still see more volatility in the Chinese market, if they widen the investigation” to include medium-size brokers, said Bernard Aw, Singapore-based market analyst with brokerage IG. “Reasonably, the investigations could continue for another one, two months.”

At the same time, the latest probe clarification on the three securities firms is a positive for some investors, who feared the companies had committed more serious violations—such as insider trading—during the market crash.

China’s smaller stock market, the Shenzhen Composite Index, up 0.9% on Monday, is up 9.4% this month.

Global markets largely shrugged off Friday’s tumble in Chinese shares, in contrast with some of the global reverberations in August. U.S. stocks finished slightly lower in an abbreviated, post-Thanksgiving session on Friday.

Earlier Monday, authorities fixed the onshore Chinese yuan at 6.3962 against one U.S. dollar, marking its weakest fixing level since late August. The move came before the International Monetary Fund is expected later Monday to add the yuan to its elite basket of reserve currencies.

The onshore yuan, which can trade within 2% up or down from the fix, was last at 6.3970 per U.S. dollar, compared with 6.3952 on Friday. Earlier it traded at 6.3980, marking its strongest level since Aug. 28.

The offshore yuan was last at 6.4288 to one U.S. dollar compared with 6.4591 earlier this morning after buying by a large Chinese bank, according to a Shanghai-based trader at a major local brokerage. He said Chinese authorities are likely trying to keep the offshore and onshore currencies within a reasonable gap ahead of the IMF decision.

Elsewhere, rebounds have also cooled. Lower commodity prices have pressured the region’s resources shares and investors are hesitant to load up on big bets ahead of central bank meetings in December. The European Central Bank has signaled that it will boost stimulus measures to head off a further slowdown in the eurozone economy at its next meeting, while the U.S. Federal Reserve is expected next month to raise rates for the first time in years.

Japan’s Nikkei Stock Average rose 3.5% this month, compared with a 9.8% jump in October.

Hong Kong’s Hang Seng Index lost 2.8% and shares in Australia and South Korea were down 1.4% and 1.9%, respectively, over the same period.

On Monday, the Hang Seng Index closed down 0.3%. The Nikkei and S&P/ASX 200 were each down 0.7%, while South Korea’s Kospi fell 1.8%.

The Japanese yen has lost about 1.8% against the U.S. dollar this month. It last traded at ¥122.83 to one U.S. dollar, roughly flat compared with Friday’s levels. A weaker currency boosts profits of the country’s exporters when they repatriate revenue from abroad.

Brent crude oil prices, the global benchmark, fell 0.4% to $44.67 a barrel on Monday. U.S. crude-oil futures slipped 3.1% to settle at $41.71 a barrel on Friday.

Gold was off 0.2% at $1054.40 a troy ounce in Asia.

Source: WSJ – Chinese Stocks: Brokerage Probes Weigh on November Stock Gains

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