China slump leads Asia shares lower on regulatory crackdown, weak profits

Chinese shares slumped on Friday, weighing on other Asian stock markets, as a fresh regulatory crackdown and falling industrial profits weighed on market sentiment.

European shares were set to follow suit, with financial spreadbetters expecting Britain's FTSE 100 to fall 0.3%, France's CAC40 to open down 0.4%, and Germany's DAX to start the day 0.1% lower.

US stock futures erased gains after earlier rising 0.3% to their highest level since November 9 following Thursday's Thanksgiving Day holiday.

Early selling intensified in China's stock markets in the afternoon, with the Shanghai Composite index and the CSI300 plunging 4.7% as of 0623 GMT, on track for the biggest one-day drop in more than three months, and set for weekly declines of 4.6% and 5%, respectively.

The Shanghai Composite Index finally closed down 5.48% to close at 3,436.3 points. The smaller Shenzhen index lost 6.31% to close at 11,961.7 points, Xinhua reported.

That contributed to a drop of 0.9% in the broadest index of Asia-Pacific shares outside of Japan, bringing losses for the week to 1.1%.Japan's Nikkei reversed earlier gains to close down 0.3%, but was on track to end the week flat.

China's securities regulator has urged domestic brokerages to cease financing clients' stocks purchases through swaps and other over-the-counter contracts, two sources with direct knowledge said, its latest move to reduce leveraged financing risk in its stock markets after a summer plunge.

"After rebounding over 20% from its bottom, you need fresh capital to maintain the upward momentum (in Chinese stocks), but recent government measures to deleverage have sparked fears," said Zhou Lin, analyst at Huatai Securities.

"In addition, I don't see signs that the economy has bottomed out."

Further weighing on sentiment was data on Friday showing that profits earned by Chinese industrial companies fell 4.6% in October, declining for the fifth consecutive month.

The Chinese yuan also came under pressure, weakening to its lowest level in almost three months as investors braced for a decision on Monday by the International Monetary Fund on whether to include the currency in its reserve basket.

Some market watchers fears Beijing's commitment to market reforms and liberalisation may cool if the yuan is added to the reserve basket.

Spot yuan opened at 6.3928 per dollar and was changing hands at 6.3942, 46 pips weaker than the previous close and about 0.04% away from People's Bank of China's midpoint rate of 6.3915.

"It's uncertain if the Chinese government is keen to show the market influence in their rate setting or whether now that they know they have gained special drawing rights inclusion they are keen to weaken their overvalued currency knowing it will not jeopardise their case," Angus Nicholson, market analyst at IG in Melbourne, wrote in a note.

The euro continued to falter, hovering near seven-month lows on expectations that the European Central Bank could announce further stimulus as early as next week.

Most in the market expect the ECB to expand its asset purchase programme and lower its deposit rate, the rate at which banks park excess funds with it, when it meets next Thursday.

Traders are now speculating that the ECB could cut rates more than the previous market consensus of a 0.10% point reduction.

The euro's three-month overnight indexed swap (OIS) rate fell to a new low around minus 0.3133%, almost 18 basis points below the current fixing level of the Overnight Eonia rate.

With keeping money in the euro seen increasingly costly because of negative interest rates, the common currency was on the defensive in the foreign exchange market.

The euro traded at $1.0614, not far from Wednesday's seven-month low of $1.0565. It also stood near a seven-month low against the yen, last fetching 129.98 yen.

"You keep losing money by holding the euro. It is hard to see the euro rising. True, it is already heavily shorted but I expect the euro to fall towards parity with the dollar," said a trader at a Japanese bank.

The euro's weekness helped the dollar hold near an 8-1/2-month peak.

The dollar index, which measures the performance of the US currency against a basket of major peers, was little changed at 99.814, after scaling 100.170 earlier in the week, the highest since March. It is up 0.3% for the week.

The yen slipped 0.1% to 122.45 per dollar, showing little response to a series of Japanese economic data including the jobless rate, which unexpectedly fell to a two-decade low of 3.1%.

Oil prices edged lower, with US stockpile data on Wednesday doing little to ease concerns about a supply glut.

US crude futures fell 1.4% to $42.45 a barrel as traders also unwound some of the buying they had made after Turkey shot down a Russian warplane earlier this week.

Brent futures edged down 0.4% to $45.30 a barrel, compared to their two-week high of $46.50 hit earlier this week.

Battered metal prices also rebounded as hedge funds covered their short positions for now.

Benchmark copper on the London Mental Exchange rose 1.9% on Thursday to $4,636.15 per tonne, recovering 4.3% from Monday's 6 1/2-year low of $4,443.50. They held steady at $4,634.50, on track for a weekly gain of 1.2%.

Zinc and Nickel also jumped sharply on Thursday, helped by expectations of output cuts in China.