CHINA’S shares sank more than 5 percent Friday in their biggest drop since this summer’s rout after both domestic and foreign media reported the stock regulator had widened its probe on brokerages to include the country’s fourth-biggest securities firm.

    The sharp drop in afternoon trade highlights the volatility of China’s markets ahead of an expected decision by the International Monetary Fund (IMF) today on whether to include the yuan currency in its global reserve basket.

    China Haitong Securities is under investigation by the China Securities Regulatory Commission (CSRC), following similar probes into two other domestic brokers.

    Shanghai-based Haitong Securities said in a statement late Friday that it is being probed for possible violation of securities regulations.

    Little has emerged as to the specific reasons for the probes, but Gu Yongtao, an analyst at Cinda Securities, said the regulator could be trying to get a better grip on leveraged trading after a near full-blown market crash a few months ago.

    “We think the purpose of the probes is to bring all businesses related to stock financing to the table so that regulators can have a clear picture of the leverage situation,” he said, adding it is likely an extension of an ongoing clean-up in illegal margin trading.

    Markets had already been jittery after domestic media reported that the regulator is urging brokerages to cease financing clients’ stocks purchases through swaps and other over-the-counter contracts, a move aimed a curbing leveraged trading.

    “The move toward deleveraging is certainly having a negative impact on investor sentiment,” said Shen Weizheng, fund manage at Shanghai-based Ivy Capital.

    At a weekly news conference in Beijing on Friday, the securities regulator confirmed that it has ordered securities firms not to finance securities trading by clients using over-the-counter derivatives.

    The CSRC probe into Haitong come on the heels of investigations into CITIC Securities and Guosen Securities, two bigger rival firms.

    Earlier selling pressure intensified late in the stock trading session, pushing the blue-chip CSI300 index down 5.4 percent and the Shanghai Composite Index 5.5 percent lower in their biggest one-day percentage loss since the nadir of the summer rout in late August.

    The flagship indices also posted their worst weekly performance since August, losing over 5 percent.

    Market sentiment was already fragile as investors braced for a fresh batch of initial public offerings this week and are cautious ahead of a possible U.S. interest rate increase next month that would be the first in around a decade.

    After the stock market slump began in mid-June, China launched a massive and unprecedented rescue effort and began cracking down on insider trading and short-selling, which it said were partly to blame for volatility.

    Haitong, along with Guotai Junan Securities, is also being probed by anti-corruption investigators, Xinhua reported Tuesday.

    In September, Haitong was fined 86 million yuan (US$13.5 million) by the regulator for breaching securities rules.

    In August, domestic media reported that a CSRC official and four senior executives from CITIC Securities had confessed to insider dealing.

    The yuan softened to a three-month low against the dollar Friday and was set for its longest weekly losing streak in five months ahead of the IMF’s decision this week. (SD-Agencies)