On the eve of China revealing is worst quarterly GDP growth figures in 24 years later today, the country’s sharemarket has sold off heavily after regulators cracked down on the popular margin trading activities of some of the countries major brokers.
Just after 1 pm, today, Sydney time, China’s national statistics bureau will reveal that the economy grew by around 7.3% or 7.4% in 2014.
That will be well under the double-digit rates China has become accustomed to in the 30 years since it began opening its economy and embracing capitalism.
In fact an annual growth rate of 7.3% would be the lowest since 1990, when the country was rocked by student protests and the Tiananmen Square massacre.
The expectations of the slowing growth story, especially the slide in the country’s huge housing sector (which impacts banks, financial companies, steel, and more), made the sharp slide in the sharemarket (down more than 5% at the opening) such a shock.
But apart from Hong Kong and Australia, the news had little impact on markets elsewhere in Asia, and in Europe (the US was closed for a holiday).
In fact European markets hit a seven year high ahead of the European Central Bank’s decision on quantitative easing on Thursday night, our time.
Led by financial stocks, Chinese shares plunged sharply yesterday after three major brokerages were banned from opening new margin accounts – a major driver in the super-charged share rally last quarter.
The Shanghai Composite closed down 7.7%% at the end of trading yesterday, after finishing Friday at a 65 month high, while Hong Kong’s Hang Seng Index fell 1.5%.
It was the biggest one day loss since 2008 and followed Chinese stockmarket regulators cracking down on margin lending. The 7.7% loss for the Shanghai Composite wiped out 2015’s gains for the main Chinese market. At one stage the Shanghai market was off more than 8%.
The fall in China trimmed a more than 60 point gain for the ASX 200 in Australia to just 9.9 points by the close yesterday.
Brokerage shares were trashed after China’s securities regulator last week said 12 brokers had violated rules in their margin trading businesses, following investigations into high-risk margin trading.
It banned Citic Securities, Haitong Securities and Guotai Junan Securities – among the country’s biggest brokerages – from opening new retail accounts for three months, after they failed to correct practices.
Foreign brokers said the move was important for investor sentiment because margin financing of share purchases (in other words, using leverage to buy shares), helped drag millions of investors back into the market and powered the 53% gain for the Shanghai market last year.
The Financial Times reported that new margin financing account openings in December alone totalled 724,000, versus a monthly average of 232,000 in the previous 11 months.
While the bans are for only three months (and not longer) the impact on market sentiment is significant, being the first time regulators have attempted to control leveraged stock dealings.
The falls were extensive among financials and 11 of the Shanghai Composite’s 12 capital markets companies had lost more than 9.5 %, with many hitting the daily limit of 10%.
Adding to the pressures on sentiment was the news over the weekend that property prices were down by an average annual rate of 4.3% in December – the largest drop since the current data series began in 2011.
While home sales rose by 9% in December (helped by the surprise interest rate cut in late November), house prices in 68 of the 70 major cities surveyed showed falls in the month.
On a month-over-month basis, prices in December slipped 0.4%, compared with a 0.6% fall in November. It was the fourth consecutive month that average prices fell less sharply than in the previous month, another small bull point.
The rate of fall on an annual basis is accelerating, December’s fall of 4.3% compared with a 3.6% fall in November and 2.5% fall in October
Property and related sectors account for nearly a quarter of China’s economy and analysts expect the slide to continue this year, especially since stocks of unsold properties rose throughout last year.
Besides the annual growth figures today, the government will release figures on industrial production, retail sales and urban investments for December and for 2014. The numbers will be unspectacular and confirm the slowing growth rate will continue into this year.
But s small note to put some context into this gloomy outlook.
An annual growth rate of 7.4%, as we should see for 2014, is a bigger dollar figure than the 12% growth in GDP seen in 2007, such has been the expansion in the size of the Chinese economy in the intervening seven years.
