An investor tracks share movements at a brokerage in Huaibei, Anhui province, on Tuesday. The Shanghai Composite Index slid 5.4 percent to 2,856.27 at the close, the most since August 2009. XIE ZHENGYI/CHINA DAILY

Benchmark sees wild swings as market weighs policy change on loan collateral

Share prices tumbled the most since 2009 in China amid volatile trading that spurred the benchmark index's biggest swings in five years on Tuesday and sent turnover to a record.

The Shanghai Composite Index slid 5.4 percent to 2,856.27 at the close, the most since August 2009, after earlier gaining as much as 2.4 percent. The nation's four biggest lenders including Industrial & Commercial Bank of China Ltd plunged more than 9 percent, while PetroChina Co, the biggest stock, slumped 8 percent. Lower-rated bonds fell and the yuan weakened to four-month lows after policymakers said riskier bonds can no longer be used as collateral for some short-term loans.

Volatility in stocks is increasing, with the Shanghai index swinging by more than 250 points, as investors assess the sustainability of a rally that has topped every other market worldwide during the past month and propelled share prices to the most expensive levels since 2011. The value of equities changing hands on mainland exchanges reached 1.24 trillion yuan ($200 billion), almost five times the one-year average.

"The policy change on bonds was the biggest drag on the market on Tuesday as there is a liquidity crunch in the market," said Zhang Gang, a strategist at China Central Securities Co in Shanghai. "Investors have been overly speculative and the irrational surge has resulted in a bigger slump. The rally has ended."

The CSI 300 Index halted its record 12-day rally, falling 4.5 percent after surging as much as 4.2 percent. The Hang Seng China Enterprises Index slid 4.6 percent, the biggest loss in three years. The Hang Seng Index fell 2.3 percent.

The Shanghai index surged above the 3,000 level on Monday, sending valuations to 11.3 times 12-month projected earnings, the highest level since July 2011. The 14-day relative strength measure also reached 89, the highest since at least 1994. Readings above 70 indicate a price may be poised to fall. The Shanghai measure has rallied 35 percent this year, compared with a 3.5 percent drop for the MSCI Emerging Markets Index.

A gauge of financial stocks in the CSI 300 plunged 6.3 percent on Tuesday, paring gains to 42 percent during a month-long rally. Ping An Bank plunged 10 percent. Ping An Insurance (Group) Co slid 8.5 percent, trimming a rally over the past week to 29 percent. A measure of energy companies dropped 5.9 percent, with Yanzhou Coal Mining Co plunging the daily limit of 10 percent and China Petroleum & Chemical Corp sliding 8.2 percent after valuations hit four-year highs last week.

"There are people cashing out, especially in energy stocks like the oil-related plays," said Ryan Huang, a market strategist at IG Asia Pte Ltd in Singapore. "Speculators are entering and triggering volatility."

The nation's clearing agency for exchanges has stopped accepting new applications for repurchase agreements that involve bonds rated below AAA or sold by issuers graded lower than AA, according to a statement on Monday.

The move will help remove riskier debt from the repo market before China requires local government financing vehicles to clarify next month which bonds are backed by the State, according to Guotai Junan Securities Co.

The yuan weakened after the slowest export growth in seven months fueled concerns about the outlook of the world's second-largest economy.

The currency dropped as much as 0.55 percent, the most on a closing basis since December 2008, according to China Foreign Exchange Trade System prices.

While the Shanghai Composite's 18 percent rally over the past month, the most among 93 global indexes, is reviving interest in mainland equities after a four-year rout, it is also drawing out skeptics who say the gains are amplified by borrowed money and don't reflect the nation's economic fundamentals.

A local securities regulator in China expressed concerns over rapidly growing risks in margin trading and short-selling businesses at a meeting on Monday, the Securities Times reported, citing an unidentified person who participated in the meeting.

Some brokerages use working capital on these businesses, which may result in liquidity risks once the market shifts direction, the Securities Times reported.

The balance of margin trading and short selling on Monday rose to 601.7 billion yuan ($97 billion), compared with 580.5 billion yuan on Friday, according to data published on the Shanghai stock exchange's website.