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June 20, 2015

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Shares fall 6.4% on wave of IPOs

CHINESE stocks plunged over 6 percent to post their worst weekly performance since the financial crisis in 2008 as investors channeled their funds into new share subscriptions, while speculation grew over stricter trading rules.

The Shanghai Composite Index tumbled 6.42 percent to 4,478.36. For the week, the gauge lost 13 percent. The Shenzhen Composite dived 6.03 percent to 15,725.47 points.

A tidal wave of initial public offerings siphoned liquidity as the IPOs of nine companies opened for subscriptions yesterday.

A total of 25 new IPOs are expected to lock up over US$1 trillion in subscriptions.

Li Shaosheng, analyst at Minsheng Securities, blamed the daily tumbles this year to basically a liquidity shortage.

Increasing speculation that the government was moving to tighten margin financing also weighed on investors. The China Securities Regulatory Commission was reported to be drafting even stringent rules on margin financing for brokerages.

In a latest rule change, brokerages’ margin trading is limited to four times their net capital and they are forbidden to lend to individuals with average daily assets of under 500,000 yuan (US$80,506) over the past 20 trading days.

Despite the backdrop of a slowing economy, China’s stock market is largely liquidity driven and propelled by margin loans. By the end of May, margin trading had risen to 2.08 trillion yuan as 3.67 million investors had borrowed capital from 92 brokerages.

Stocks fell across the board led by road builders. Shandong Hi-speed Co, Hubei Chutian Expressway Co, Sichuan Expressway Co and Chongqing Road & Bridge Co all fell by the daily 10 percent limit to 9.95 yuan, 7.80 yuan, 8.34 yuan and 13.19 yuan respectively.


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