Chinese stocks, yuan tumble after Beijing tightens credit

China’s stocks, currency and corporate bonds suffered their biggest fall in years Tuesday after Beijing took steps to introduce restrictions on the corporate bond market.

The benchmark Shanghai index was down 5.4 per cent after hitting a record level earlier in the session. The index has been on a wild ride this year, climbing 40 per cent since the summer despite indications the Chinese economy is weakening.

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China’s financial services regulator banned investors from using low-grade corporate debt as collateral to borrow cash, a move geared to reducing risks to the financial sector.

China is concerned about high leverage investing that has pushed Shanghair stocks higher and about the massive debts taken on by local governments to fund infrastructure projects.

Bonds fell sharply in response to the move and the yuan fell to a five-month low against the U.S. dollar.

Asian stocks fell, Europe follows

Hong Kong’s Hang Seng index fell 2.3 per cent and Japan’s stocks were down 0.68 per cent, while Europe’s markets headed lower on the selloff in Asia.

Europe's stocks were also hit by news of a snap election in Greece, which knocked down Greek stocks by 13 per cent.

Investors in China have widely expected more stimulus spending from government, as China’s GDP is expected to miss this year’s growth target of 7.5 per cent.

But as policy makers gather in Beijing for a key summit, the Communist Party’s flagship newspaper, the People's Daily, spoke of the need for slower growth and more structural reform.

“The important objectives are to adjust the economic structure and boost its quality,” said Liu Shijin, vice president of the State Council’s Development Research Center, in the commentary.

Don't expect stimulus

“As the economy begins to lose momentum, an appropriate amount of stimulus may be required. ... But it should be made clear that stimulus should only be used to regain economic balance and should not be seen as a way to solve medium and long-term structural problems.”

The newspaper also had a front-page report saying an end to high growth was the “new normal.”

For the past few years, the world has relied on China's growth to help stimulate demand for oil, other commodities and consumer goods. Its slowdown has helped contribute to the falling price of oil.

The summit is expected to downgrade China’s growth target to seven per cent in 2015.