China stocks tumble most since summer as probe widens

Shares fall 5% as fourth biggest security firm comes under scanner

Chinese shares sank more than 5 per cent on Friday in their biggest drop since this summer's rout after Reuters reported the stock regulator had widened its probe on brokerages to include the country's fourth-biggest securities firm.

The sharp drop in afternoon trade highlights the volatility of China's markets ahead of an expected decision by the International Monetary Fund (IMF) on Monday on whether to include the yuan currency in its global reserve basket.

China Haitong Securities is under investigation by the China Securities Regulatory Commission (CSRC), two people with direct knowledge of the matter told Reuters, following similar probes into two other domestic brokers.

The brokerage later confirmed the news, saying in a statement published on the Shanghai stock exchange that it is being probed for possible violation of securities regulations.

Little has emerged as to the specific reasons for the probes, but Gu Yongtao, an analyst at Cinda Securities, said the regulator could be trying to get a better grip on leveraged trading after a near full-blown market crash a few months ago.

"We think the purpose of the probes is to bring all businesses related to stock financing to the table so that regulators can have a clear picture of the leverage situation," he said, adding it is likely an extension of an ongoing clean-up in illegal margin trading.

Markets had already been jittery after Reuters reported that the regulator is urging brokerages to cease financing clients' stocks purchases through swaps and other over-the-counter contracts, a move aimed a curbing leveraged trading.

"The move towards deleveraging is certainly having a negative impact on investor sentiment," said Shen Weizheng, fund manage at Shanghai-based Ivy Capital.

At a weekly news conference in Beijing on Friday, the securities regulator confirmed that it has ordered securities firms not to finance securities trading by clients using over-the-counter derivatives.

The CSRC probe into Haitong come on the heels of investigations into CITIC Securities and Guosen Securities, two bigger rival firms.

Sliding market

Earlier selling pressure intensified late in the stock trading session, pushing the blue-chip CSI300 index .CSI300 down 5.4 per cent and the Shanghai Composite Index .SSEC 5.5 per cent lower in their biggest one-day percentage loss since the nadir of the summer rout in late August.

The flagship indexes also posted their worst weekly performance since August, losing over 5 per cent.

Market sentiment was already fragile as investors braced for a fresh batch of initial public offerings next week, and are cautious ahead of a possible US interest rate increase next month that would be the first in around a decade.

After the stock market slump began in mid-June, Beijing launched a massive and unprecedented rescue effort and began cracking down on insider trading and short-selling, which it said were partly to blame for volatility.

Haitong, along with Guotai Junan Securities, is also being probed by anti-corruption investigators, the official Xinhua news agency reported on Tuesday.

In September, Haitong was fined 86 million yuan ($13.5 million) by the regulator for breaching securities rules.

In August, state media reported that a CSRC official and four senior executives from CITIC Securities had confessed to insider dealing.

The yuan CNY=CFXS softened to a three-month low against the dollar on Friday and was set for its longest weekly losing streak in five months ahead of the IMF's decision next week.

Some traders expect Beijing may allow the currency to depreciate after it is included in the IMF's Special Drawing Rights basket, partly to reflect China's slowing economic growth.