China stocks opened Friday trading lower with the main Shanghai market down 3% after a day of sharp losses on Thursday as investors ignored attempts by the government to stop the rot.
Where Shanghai ends up by the close late Friday no one knows – it could finish with a big gain as the Chinese government makes more attempts to halt the rout – it could equally lose another 3% or 4% and suffer yet another Friday sell off.
But whatever happens, its clear there has been an enormous loss of confidence among Chinese investors that an increasingly desperate government can’t put right.
The Australian market was sharply lower up to noon – thanks to fears about Greece, China and a 6% slide in world iron ore prices on Thursday night and lower oil and gold prices.
The market was down more than 80 points, or well over 1.5% just before Noon.
Thursday saw the CSI300 index of the largest listed companies in Shanghai and Shenzhen fall 3.4%, while the Shanghai Composite Index lost 3.5%
But the smaller Shenzhen market tanked 5.6% and the ChiNext of small cap tech based stocks lost another 4% in value. Hundreds of billions of dollars in value were wiped out for yet another day and the losses since the peak on June 12 are approaching $US2.5 trillion, according to some estimates.
The losses, especially in Shanghai were trimmed by a late buying surge on Thursday, which was put down to some strategic buying by government funds to knock the edge off what was shaping up as another 7% slide.
Shanghai has now lost 25% in value since its peak on June 12 (28% if the opening 3% slide holds for all of Friday) and the losses yesterday came despite the most concerted effort yet by regulators to try and control the wild trading.
The government tried to stem the selling by relaxing rules on margin lending, cutting taxes and trying to sell the idea of a stable market by way of front page stories in official media and on websites.
In a move late Wednesday, Chinese regulators moved to ease restrictions on margin lending much earlier than scheduled (there was supposed to be a month long period for discussion, then consideration followed by the eventual decision. The ‘Yes” decision was made very quickly). The move was an about face from criticism by regulators about the dangers of margin trading and a crack down on so-called ‘grey trading’.
China’s outstanding margin loans currently total around 2.1 trillion yuan ($338.68 billion), according to Marketwatch and the Financial Times, more than five times what it was a year ago. Much of this has been done outside normal area of trading through brokers – some of the country’s brokers have special funds (called umbrella trusts) to facilitate this trading.
In April, regulators took various steps to rein in margin trading and in June, the China Securities Regulatory Commission (CSRC) said it was revising rules to ensure an “orderly development” of margin trading, worrying some investors that rules would be further tightened. But on Wednesday, the CSRC reversed course, announcing several moves to encourage margin lending.
First, it said it would cut the required ratio of borrowers’ total assets to margin loans, thereby allowing investors more of a cushion before being forced to sell shares as their losses mount. On top of this the regulators said they would allow brokers to negotiate rollovers of margin loans directly with clients.
And regulators also opened up margin trading to more investors, allowing those with less than 500,000 yuan ($US80,600) in their investment accounts to engage in the practice.
And in yet another step, brokerages will be able to securitise their margin loans, which would boost the amount they can lend without pressuring balance sheets.
In a separate statement reported by Xinhua news agency, the market regulator said it would allow stock brokerages to issue or transfer short-term corporate bonds via stock exchanges and trading systems between institutions to widen their funding channels. And separately, the Shanghai and Shenzhen stock exchanges cut fees on securities transactions by a third to encourage more buying.
And In another move to support the market the securities regulator issued rules expanding finance options for securities brokerages. A pilot project that allowed 20 large brokerages to sell bonds on the stock exchange will be expanded to the entire industry.
These moves follow ones earlier in the week allowing China’s pension funds to invest up to 30% of their assets in stocks (that is estimated at $US97 billion). And on the weekend the central bank cut interest rates and the reserve lending ratios for banks to boost lending (to brokers and investors?).
As well the central bank has been pumping cash into the country’s financial markets this week to maintain high levels of liquidity and avoid the market crunch sucking money out of the markets.
A front-page article in the state-run Shanghai Securities News about changes to margin-lending rules had the headline “Unite Our Wills Like a Fortress to Stabilize Market Expectation.” A front page article in the China People’s Daily talked about the need for a “stable market”. But a late headline on the official government news website, Xinhua, talked about the ‘fragile’ state of the market – a realistic comment, but still an understatement.
