Shanghai stocks are getting smashed after China’s regulator suspended three major brokers from adding margin lending accounts for three months following alleged rule violations.

The index is down 6.5%, or 219.32 points, to 3,157.18.

“The three were found be rolling over (margin trading) contracts for a large number of clients in violation of rules and had been warned,” Deng Ge, a spokesperson for the China Securities Regulatory Commission, told a news conference in Beijing. “However, they did not correct the mistakes.”

Broking houses on the Shanghai Exchange are getting smashed.

CITIC Securities shares are down 10% to 29.62 Chinese Yen, Haitong Securities down 13.7% on the Hong Kong exchange to 15.880 HKD and Guotai Junan is weaker by 7.31% to 5.450 HKD.

In other major falls, Sinolink Securities and China Merchants Securities are both down 10% in Shanghai.

Stam Shamu at IG says:

“Citic Securities and Haitong Securities shares were aggressively sold off after regulators suspended the companies from margin activities. While this is putting a dent in equities in the near term, the intentions seem good as officials continue to reign in reforms and curb excessive speculation. Developers are also struggling as China‚Äôs property prices remain a big source of concern.”

Across the region Chinese weakness is sapping early strength. The Hang Seng is down 1.17% to 23,821 while in Australia the ASX is now up just 0.3% at 5,331 off the high above 5,370 early in the day’s trade. In Tokyo the Nikkei is also off its highs up 0.56% to 16,958.

Here’s the latest chart.

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