* CSI300 -3.8 pct; SSEC -4.1 pct; HSI -1.5 pct
* Outstanding margin shrinks for 3rd straight day
* Investor worry over policy directions
SHANGHAI, June 26 (Reuters) - China stocks tumbled more than 4 percent on Friday as spooked investors dumped shares as regulators cracked down on risky margin trading and on mounting uncertainty over the direction of Beijing’s monetary policy.
The plunge in mainland shares for a second straight day also weighed on the Hong Kong market, which was already under pressure from weak regional and global markets as Greece failed again to reach an agreement with its creditors.
By midday, the CSI300 index was down 3.8 percent at 4,525.76 points, while the Shanghai Composite Index tanked 4.1 percent to 4,344.06 points.
Both indexes are on track to fall over 2 percent for the week, extending last week’s 13 percent drop.
If CSI300 “doesn’t hold the 4,630 level then it will move to test 5,575 and then 4,470 before having no credible technical buying support left following a massive rally over the last year or so,” investment advisor Rivkin said in a note.
Further falls in China stocks “will send ripples throughout Asian markets,” Rivkin said.
In Hong Kong, the Hang Seng index dropped 1.5 percent, to 26,740.96 points, while the Hong Kong China Enterprises Index lost 1.6 percent, to 13,258.38.
China’s stock market has more than doubled over the past year, beating major global indexes, even as the country’s economy slows.
The frenzied eight-month-long bull run was underpinned by rapidly-expanding margin financing, monetary easing and hopes of economic restructuring, but analysts said two of the three legs are now shaky.
Regulators have been cracking down on illegal margin financing and urging brokerages to tighten rules. Many investors have also faced increasingly expensive margin calls in the past week as share prices have retreated.
Outstanding margin loans shrank for the third straight day on Wednesday to 2.2 trillion yuan ($354.35 billion).
That signalled a reduction of 61.5 billion yuan worth of leverage during the previous three sessions, as regulators step up efforts to tighten margin activities.
And further monetary easing -- another pillar of investor optimism -- is also in question, according to Jiang Chao, strategist at Haitong Securities.
“Recent bond market performance reflects institutional investors’ view that the rate cut cycle is coming to an end,” he said, adding that an improving real estate market, and the issuance of municipal bonds have made the central government less eager about further easing.
His view was echoed by Morgan Stanley, which sees Shanghai’s benchmark index falling between 2 and 30 percent from current levels over the next 12 months, citing heavy equity issuance, weak corporate earnings, demanding valuations and excessive levels of margin financing.
Stocks fell across the board on Friday, with Shenzhen’s ChiNext slumping over 7 percent.
Brokerages shares were uninspired by Guotai Junan Securities’ 44 percent rise on its first day of trading, as stocks going limit up on their debut day has been a typical phenomenon in China in recent months. (Samuel Shen and Pete Sweeney)