(Adds letter to analyst name in 3rd paragraph, making it Changchun)
* CSI300 -6.3 pct, SSEC -6.3 pct, HSI -1.1 pct
* Margin trading penalties cause plunge in brokerages
* Draft rules on entrusted loans hit bank stocks
By Sue-Lin Wong
SHANGHAI, Jan 19 (Reuters) - China stocks collapsed in morning trade on Monday, with financials hammered after regulators cracked down on credit products that have been blamed for fuelling excessive market speculation over the past three months.
Brokerage shares tumbled after the securities regulator punished industry heavyweights for illegal operations in their margin trading business while banks were hit after the banking regulator issued draft rules to tighten supervision of entrusted loans, a kind of shadow banking product.
“The entrusted loan regulation and margin trading penalties had combined impacts on market sentiment, adding to volatility and leading investors to turn negative,” said Du Changchun, analyst at Northeast Securities in Shanghai.
“These two regulatory moves, in essence, hinder capital inflows, which have been the most significant reason behind the market’s recent rally,” he said.
The CSI300 index tumbled 6.3 percent to 3,404.69 points at the end of the morning session. The Shanghai Composite Index also shed 6.3 percent, to 3,163.72 points.
In contrast, China’s NASDAQ-like ChiNext Composite index rose 1.4 percent on Monday.
The SSEC, the index most closely watched by mainland Chinese investors, is on track to suffer its biggest one-day percentage drop since September 2009.
China CSI300 stock index futures for February fell 7.4 percent to 3,413.
“When large caps fall, we often see the ChiNext rise,” said Huang Cendong, an analyst at Sinolink Securities.
The financial sub-index plummeted 9.4 percent, led down by China’s top two brokerages CITIC Securities and Haitong Securities, which fell by the 10 percent daily limit. This dragged smaller rivals lower as well, with every stock on the sub-index dropping.
Bank shares also tumbled, with the sector sub-index falling 9.6 percent at midday.
Bank and brokerage shares were the biggest beneficiaries of the fourth quarter 2014 recent rally, with the financial sub index rising 80 percent compared with a 44 percent rise in the CSI.
The Hong Kong market followed the mainland market as the Hang Seng index dropped 1.1 percent, to 23,828.87 points.
The Hong Kong China Enterprises Index plummeted 4.2 percent, to 11,564.27.
A fall in Hong Kong “is likely to continue for several days because investors are already in the mood to sell-off stocks,” said Ben Kwong, the director of KGI Asia in Hong Kong.
“Sentiment is cautious because of the euro and the Greek election but I don’t think the bull market has ended,” he said
New A-share account openings bit.ly/1wvJ9S9
China trading volumes hit records in 2014 link.reuters.com/vag73w
Additional reporting by the Shanghai Newsroom; Editing by Richard Borsuk