China stock market closed down by more than 5% after several major brokerage companies announced they were under investigation.
The Shanghai Composite index ended the day 5.5% lower at 3,436.3 points – marking its biggest drop since August.
On November 26, it was announced that China’s securities regulator was investigating the country’s largest brokerage, CITIC Securities.
CITIC Securities is being probed over the possible breaking of market rules.
Rival brokerage Guosen Securities is also being investigated, and shares in both CITIC and Guosen fell by 10%, the maximum allowed in one day.
In addition, trading in China Haitong Securities shares was halted and later in the day the company also confirmed it was under investigation.
Chen Xingyu, an analyst at Phillip Securities, told the AFP news agency: “The biggest reason for such a sudden drop today is because of regulator’s investigation of the top brokers. It has triggered a broader sell-off.”
Analysts said there was little information on the specific reasons for the probes other than violations of securities regulations.
Reuters reported that the Chinese regulator was urging brokerages to stop financing investors’ stock purchases through swaps in an attempt to curb leveraged trading.
A crackdown on leveraged and margin trading has been underway since the Chinese market’s dramatic plunge over the summer.
Market sentiment was already wavering ahead of a new batch of initial public offerings set to make their debut next week.
More negative economic data on the Chinese economy also did little to boost investors’ confidence, with government figures showing that industrial profits in October fell 4.6% from a year ago.
The fifth consecutive decline in profits earned by Chinese industrial companies added more fuel to concerns over a slowdown in the world’s second-largest economy.
China’s leading brokerage, CITIC Securities, overstated its derivative business by $166 billion from April to September, according to the country’s securities association.
The Securities Association of China said CITIC Securities inaccurately inflated the amount of its equity swap transactions in a report submitted in October.
CITIC said the error occurred due to a system upgrade and has been corrected.
Investigations have resulted in executives confessing to insider trading at CITIC.
In September, shares of China’s largest state-owned brokerage slumped after it reported that three executives, including its president, were under police investigation.
CITIC has been part of a crackdown by China’s regulators on irregular stock trading since mainland markets plunged dramatically in mid-June.
The securities association, which is partly overseen by the China Securities Regulatory Commission, said it was investigating CITIC’s overstatement and would take further action if necessary.
It did add that the error did not affect the month-end net size of CITIC’s business.
The brokerage told the Reuters news agency that it had amended the figures at the start of November and the size of its swaps business was $6.2 billion.
An equity swap is a type of derivative that refers to a cash exchange between realized gains on specific stocks and fixed interest rates over a certain period of time in the future.
China’s CITIC Securities stocks fell as much as 4% after the state-owned brokerage said three executives, including its president, were under police investigation.
The executives of China’s largest brokerage are being investigated for suspected insider trading and “leaking inside” information.
The investigation comes as Beijing intensifies the scrutiny on irregular stock trading that has rocked Chinese shares.
Mainland Chinese shares have lost about 40% of their value since mid-June.
Those being investigated are Cheng Boming, the general manager and president of CITIC since 2012, Wang Jinling, the vice manager of information technology, and Yu Xinli, the head of operational management, the company said in a statement on the Shanghai stock exchange website.
In August 2015, four other senior executives admitted to insider trading, according to state media.
CITIC’s Shanghai and Hong Kong listed shares were down over 2% on the news on September 16. Its Shanghai listed shares have lost over 60% of their value so far this year.
Chinese regulators have been cracking down on alleged market manipulation intensely among other restrictive measures since mainland shares started their steep slide downwards in June.
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