China share ETF suffers record drop amid new debt curbs

The largest U.S. exchange-traded fund that tracks mainland Chinese stocks sank the most on record after policy makers tightened curbs on the local debt market, fueling a rout across asset classes.

The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) tumbled 7.3% in New York, the most since its November 2013 debut, while the iShares China Large-Cap ETF, which tracks Hong Kong-listed companies, posted the biggest drop in 10 months. Stocks in China slid the most since 2009 as lower-rated bonds plummeted and the yuan weakened. The Bloomberg index of the most-traded Chinese stocks in the U.S. fell 2.1%.

Catching investors off guard, Chinese authorities announced restrictions in the use of local-government debt in an effort to bring more transparency to the market. Expectations for monetary stimulus in the world’s second-largest economy had increased after policy makers, faced with the slowest growth in two decades, cut benchmark rates last month, fueling a 21% surge in the Shanghai Composite Index and sending share prices to the most expensive levels in three years.

“The present leadership is willing to tolerate lower growth in return for structural reforms in the economy,” Michael Wang, an emerging-markets strategist at Amiya Capital, said. “The Chinese government tightened margin rules. They increased the quality of the margin, that’s the reason why there was a reaction in equities — there is fear that there would be less inflows now.”

LIQUID ASSETS

Bonds rated below AAA or sold by issuers graded lower than AA are no longer allowed for use as collateral in short-term loans obtained through repurchase agreements, the nation’s clearing agency for exchanges said Dec. 8. The decision means about 470 billion yuan ($75.8 billion) of outstanding debt can no longer be pledged in repo agreements, according to Haitong Securities Co. The Shanghai stock gauge sank 5.4% as some investors sold liquid assets as an alternative source of cash.

China’s leaders Monday gathered for the annual Central Economic Work Conference to set the tone for macroeconomic policy for the next 12 months, the official Xinhua News Agency said. The nation may lower its economic growth target to 7% in 2015 from 7.5% this year, Goldman Sachs Group Inc. said Dec. 1. The People’s Bank of China unexpectedly cut borrowing costs on Nov. 21, spurring speculation it will follow up with a reduction in banks’ reserve ratio requirements.

The Deutsche X-Trackers ETF slid to $32.57, tumbling from a record high reached the previous day. The ETF boosted its cap on new creations to 250,000 shares, or five units, on Dec. 1 after receiving 960 million yuan of new quota to invest in mainland shares. The iShares China ETF fell 3.3% to $40.29. The Bloomberg China-US gauge dropped to a one-week low of 107.05 in a second day of declines.

INTERNET RALLY

Some U.S.-listed Chinese shares benefited from the mainland selloff, with Alibaba Group Holding Ltd. (BABA), China’s biggest e-commerce company, rebounding 2.3% in New York from a five-week low. JD.com Inc. (JD) surged 9.4%, the most in six months, after losing one-third of its value since an August high.

Qihoo 360 Technology Co. Ltd., owner of China’s second-biggest online search engine, added 4.4% and 500.com Ltd, an online sports lottery service provider, rose 4.8%.

The nation’s four biggest lenders including Industrial & Commercial Bank of China Ltd. plunged more than 9% in Shanghai, while PetroChina Co., the biggest stock, slumped 8%. The CSI 300 Index (SHSZ300) halted its record 12-day rally and the Hang Seng China Enterprises Index slid 4.6%, the biggest loss in three years.