Three reasons why Chinese markets cracked over 5% today

Jitters in Chinese markets resurfaced on Friday as flagship indices CSI300 and Shanghai Composite logged their biggest percentage loss since August 25.

The blue-chip CSI300 index slumped 5.4 per cent, to 3,556.99 points, while the Shanghai Composite Index plunged 5.5 per cent to 3,436.30 at close after falling as much as 6.1 per cent in the afternoon session.

Here are three reasons why Chinese markets slumped today:

1) Regulatory crackdown on leverage activities

Market regulator China Securities Regulatory Commission (CERC) started investigations into China's biggest brokerage CITIC Securities and its smaller rival Guosen Securities as they allegedly reported inaccurate numbers in statistical reports on over-the-counter equity swap deals partly carried out during the summer's stock market rout.

"Another brokerage firm Haitong Securities also came under investigation by the country's market watchdog," a Reuters report noted.  

Marketmen turned cautious as CERC urged brokerages to cease financing clients' stocks purchases through over-the-counter swap contracts, in order to check on leverage activities.

"The deleverage move certainly have a negative impact on investor sentiment. In addition, it fuels concerns that more brokerages would be probed and more executives would fall," told Shen Weizheng, fund manager at Shanghai-based Ivy Capital to Reuters.

2) Industrial profit data

Profits earned by Chinese industrial companies fell 4.6 per cent in October, declining for the fifth consecutive month, data from the statistics bureau showed on Friday.

Industrial profits, which cover large enterprises with annual revenue of more than 20 million yuan ($3.13 million) from their main operations, fell 2.0 per cent in the first 10 months of the year compared with the same period a year earlier, the National Bureau of Statistics (NBS) said on its website.

In September, profits fell 0.1 per cent from a year earlier.

"I don't see signs that the economy has bottomed out," told Zhou Lin, analyst at Huatai Securities to Reuters.

3) Possible yuan inclusion in SDR basket

The yuan softened to a three-month low against the dollar on Friday and was set for its longest weekly losing streak in five months ahead of the International Monetary Fund (IMF)'s decision on whether or not to include the currency in Special Drawing Rights (SDR) basket. IMF is likely to decide on yuan's fate on November 30.

Market watchers fear Beijing's commitment to market reforms and liberalisation may subside if the yuan is added to the reserve basket.

"Some traders expect Beijing may allow the currency to depreciate after it is included in the IMF's Special Drawing Rights basket, partly to reflect China's slowing economic growth," said Reuters report.

SDRs are supplementary foreign exchange reserve assets defined and maintained by the IMF. Their value is based on a basket of key international currencies reviewed by IMF every five years.