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China ETFs face heavy selling as Shanghai stocks plunge

By Ashley Lau

NEW YORK, May 28 (Reuters) - China exchange-traded funds trading in the United States faced heavy selling on Thursday, mirroring a sharp plunge in Shanghai stocks, after more brokerages in China said they would tighten margin rules and the central bank moved to soak up money market liquidity.

Among the biggest decliners, the Deutsche X-trackers Harvest CSI 500 China-A Shares Small Cap ETF dropped 7.2 percent, while the KraneShares Bosera MSCI China A Share ETF declined 7.2 percent and the Market Vectors ChinaAMC A-Share ETF sank 7.1 percent.

ETFs with exposure to China's onshore market, so-called A shares, were hit the hardest, with those funds tied to Chinese companies listed in Hong Kong and the United States hit to a lesser extent.

At least three Chinese brokerages, including Guosen Securities Co, Southwest Securities Co, and Changjiang Securities Co said on Thursday they would tighten margin requirements. The move comes as China's central bank drains money from cash-flush banks in a move to mop up excess liquidity in the financial system.

The announcement that Central Huijin Holdings, an asset management company controlled by Beijing, had reduced its holdings in major state-owned banks China Construction Bank and ICBC also contributed to the selling, said Aaron Dillon, a managing director with New York-based KraneShares.

"One of the positions was sizeable, so the market reacted negatively to that," said Dillon, whose firm KraneShares focuses on investing in China. "It's kind of a knee-jerk reaction, where you have some of the fast money reacting, but no one really for the long haul is going to make a dramatic move."

The Direxion Daily FTSE China Bull 3x Shares ETF was the biggest decliner among U.S.-listed ETFs on Thursday, dropping as much as 12.3 percent. The ETF is a leveraged fund that aims to track three times the daily performance of the FTSE China 50 Index.

The sharp declines follow a surge in China A-Share ETFs earlier this week, after FTSE Russell, one of the world's largest index providers, announced it would be taking steps to bring local China shares into its global benchmarks. That news sent several China A-Shares ETFs to all-time highs.

(Editing by Bernadette Baum)