Why Chinese Stock Market Suffer Biggest One-Day Tumble Since June 2008...............

Chinese stocks plunged Monday after the country's securities regulator rapped three major brokerages for continuing to lend money for stock purchases in violation of rules. As punishment for extending so called ``margin trading'' contracts, the brokerages are forbidden to offer credit to new customers for three months. 
 China stocks suffered their biggest one-day percentage drop in more than six and a half years, dragged down by record tumbles in financial stocks as authorities battled excessive market speculation.Regulators cracked down on margin trading, which has been blamed for fuelling a wave of speculation over the past three months. Bank stocks were hit after the banking regulator issued draft rules to tighten supervision of entrusted loans, a kind of shadow banking.


HOW MUCH DID SHARES FALL? 
The banks sub-index plummeted 9.97 per cent and the financial sub-index sank 9.62 per cent.
The CSI300 index of the largest listed companies in Shanghai and Shenzhen fell 7.7 percent, to 3,355.16. The Shanghai Composite Index also lost 7.7 percent, to 3,116.35 points.

The falls were the biggest for both indexes since June 10, 2008.Among the most active stocks in Shanghai were Bank of China, down 10.0 per cent to 4.48 yuan; Agriculture Bank of China, down 9.9 per cent to 3.55 yuan and ICBC, down 9.9 per cent to 4.64 yuan.In Shenzhen, BOE Technology , down 8.5 per cent to 3.01 yuan; TCL Corp, down 7.7 per cent to 3.71 yuan and Guosen Securities, down 10.0 per cent to 21.31 yuan were among the most actively traded.
Foreign investment flowing into Shanghai from Hong Kong through the mutual market access pilot programme took up -0.33 billion yuan of the 13 billion yuan daily quota.Total volume of A shares traded in Shanghai was 40.0 billion shares, while Shenzhen volume was 19.5 billion shares.

WHY DID THE MARKET FALL SO MUCH? 

Investors and analysts see the penalties against the brokerages as foreshadowing more curbs on credit-financed trading by China's government. Authorities want to stop the stock market's boom over the past year from turning into a bubble that could damage the broader economy. The Shanghai Composite surged 54 percent last year, partly because of easy credit that investors used to finance their trading. Market selloffs can also become self reinforcing as other investors sell because of fear they will suffer even greater losses if they do nothing. 


WHY DIDN'T OTHER ASIAN MARKETS FALL TOO? 

Even though Monday's fall was particularly steep, investors in other markets are brushing it off as a situation peculiar to China. The government only allows limited foreign investment in Chinese stocks and the country's financial system is largely walled off to the rest of the world. The exception was Hong Kong, where many Chinese companies have stock market listings. A bigger catalyst for global markets will come Tuesday when China, the world's No. 2 economy, reports fourth quarter growth figures. 

WHAT ARE MARKET EXPERTS SAYING? 

``Margin financing is simply overextended,'' said Dickie Wong, executive director of research at Kingston Securities in Hong Kong. Regulators want to ``simply give pause'' to the brokerages, he said. ``In the past, mainland investors had no clue on margin financing and short selling, but after China introduced these two ways to trade stocks, people became so happy because they can borrow money and just go all in.'' 

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