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By Bloomberg

Chinese stocks fell to the lowest level in three months as margin traders continued to unwind positions amid doubts over the effectiveness of government measures to support equities.

The Shanghai Composite Index slid 4.2 percent to 3,880.69 at 1:54 p.m local time. The gauge has tumbled 25 percent from its June 12 peak, helping wipe out at least $2.4 trillion of value, or more than France’s entire stock market. A gauge of volatility jumped to the highest level since 2008 as stocks whipsawed throughout the session.

The regulator announced late Wednesday it will no longer require brokerages to force the sale of stock held by clients with insufficient collateral, while the Shanghai Stock Exchange said the nation’s two bourses will lower transaction fees by 30 percent on Aug. 1. The moves follow a weekend interest-rate cut and calls by the regulator for investors act rationally and not believe “shorting China rumors.”

“When investors lose confidence and rush to sell, these short-term measures will be hardly sufficient to stop the rout,” said Chen Xingdong, the chief economist and head of macro-economics research at BNP Paribas SA in Beijing. “In the long term, regulators should let the market play a bigger role. Official media have been talking up the market and people have been chasing hot stocks regardless of their fundamentals.”

Margin debt on the Shanghai Stock Exchange fell to 1.33 trillion yuan ($214 billion) on Wednesday for an eighth day of losses, the longest stretch of declines since the city’s bourse began to compile the data in March 2010. A five-fold surge in leveraged wagers had helped propel the Shanghai index to a more than 150 percent gain in the 12 months through June 12.

Guotai Junan

The CSI 300 Index declined 3.2 percent. Hong Kong’s Hang Seng Chinese Enterprises Index dropped 1.4 percent. The Hang Seng Index gained 0.3 percent on a rally by casino operators.

Gauges of utility, energy, industrial and technology companies in the CSI 300 sank more than 5 percent. Huaneng Power International Inc. plunged 9.5 percent, while China Eastern Airlines Corp. tumbled by the 10 percent daily limit.

Guotai Junan Securities Co., which completed China’s biggest initital public offering in five years last month, fell 7.3 percent. Its 77 percent gain in the four days since its IPO is the worst start among 190 initial share sales on mainland bourses this year.

Chinese stocks have been on a rollercoaster over the past few days as investors are torn between hefty valuations and the government’s efforts to prop up the market. The Shanghai benchmark slid 5.2 percent Wednesday after jumping 5.5 percent on Tuesday, sending 30-day volatility to the highest level since December 2008.

Government Support

“There are more margin calls for the market to digest from yesterday’s declines,” said Jimmy Zuo, a trader at Guosen Securities Co. in Shenzhen. “The volatility isn’t surprising. But I won’t be so pessimistic about the market after a slew of good market-supporting measures. The government is determined to defend the 4,000 level.”

Continued declines in the Shanghai Composite risk sparking sporadic social unrest, BMI Research said in a statement Tuesday. Individual investors account for about 80 percent of trading on mainland Chinese exchanges.

Signs of government support at key levels in China’s stock market stretch back to at least June 2005, when the Shanghai Composite briefly fell below the 1,000 level. The regulator responded by urging funds to stabilize the market and allowing companies to buy back their own shares, which sparked a 12 percent rally over four days. In May last year, there were signs policy makers were acting to prevent the gauge from dropping below the 2,000 level.