Chinese equities plunged the most in five years, led by brokerages, after regulatory efforts to rein in record margin lending sparked concern that speculative traders will pull back from the world's best-performing stock market.

The Shanghai Composite Index sank 6.3 per cent to 3,163.72 at 11.30am local time.

Chinese brokerages' shares plunged after the securities regulator suspended three of the biggest firms from adding margin-finance and securities lending accounts for three months following rule violations.

Citic Securities, the nation's biggest broker, fell 14 per cent yesterday. Haitong Securities and Guotai Junan Securities were among others whose shares tumbled.

Advertisement

The trio were suspended after letting customers delay repaying financing for too long, the China Securities Regulatory Commission said, without giving more details.

The penalties have raised concern that policy makers are trying to curb a surge in stock purchases using borrowed money, after outstanding margin loans surged to 1.08 trillion yuan last week from about 400 billion yuan at the end of June last year.

The Shanghai gauge advanced 2.8 per cent last week, a tenth week of gains that's the longest winning streak since May 2007, after credit growth expanded and speculation grew that the central bank will cut reserve-requirement ratios.

Regulators may have been concerned that stock gains, partly driven by margin financing, are too rapid, according to Hao Hong, a strategist at Bocom International Holdings in Hong Kong.

"Brokerage shares are likely to get hit," Hong said before the market opened yesterday. "After all, margin financing is one of the reasons for people to be bullish on brokerage stocks, and these stocks have run particularly hard."

Meanwhile, investors are awaiting China's economic growth data which is likely to show a further slowdown, and are anticipating possible stimulus moves by the European Central Bank. Markets generally settled after volatility provoked by the Swiss central bank's decision last week to untether the franc from the euro.

- Bloomberg