Shanghai’s high-flying stock market plunged 7.7% Monday after regulators moved to rein in a wave of margin buying that helped fuel a more than 60% surge by the Shanghai Stock Exchange Composite index during the second half of 2014.
Citing violations of margin trading rules, the China Securities Regulatory Commission ordered major brokerage firms CITIC Securities, Haitong Securities and Guotai Junan Securities to halt opening new margin accounts for three months.
The resulting 260.14 point drop, to a Monday close of 3,116.35, was nonetheless only the lowest close since Dec. 25, when the SSE finished the day at 3,072.54.
A Morgan Stanley research note late Monday predicted “meaningful near-term impact on A-share performance and turnover,” citing in particular the CSRC’s reiteration of minimum margin account opening balance requirements, which had clearly not been honored in many cases over the past year.
But on balance, the research note said the evidence that regulators remain focused on risk can be expected to pave the way for a healthier market over the long term.