China is getting desperate in its battle to halt the rout on its stockmarkets, stepping up the pace of moves over the weekend to try and hold the line when trading resumes later today.
As a result, the government has started investigating short sellers (a popular political target), frozen new share floats, and set up a market-stabilisation fund on Saturday, on top of the plethora of moves over the past week that have ranged from interest rate and tax cuts to relaxing rules on margin trading, and allowing brokers to sell off their margin loans – all of which had no impact whatsoever.
On Friday, China’s securities regulator said it will also revise rules to encourage foreign investment in the market. Chinese media reports also said that a unit of China’s sovereign wealth fund has been buying exchange-traded funds in the past week to support the market.
The move on short sellers was a crude attempt to divert attention away from the continuing slide in the markets last week and investors ignored repeated attempts by the government and regulators to halt the rot by cutting taxes on shares, easing the rules on margin trading and expanding the range of investors who can use margin trading.
Some of these moves represent radical (for China) moves to relax market rules – but that had no impact and the key Shanghai market lost more than 12% last week, on top of the 6% plus loss the week before and the massive 13.3% slide two weeks ago. All up the Shanghai market is off close to 30% since its peak on June 12.
The move to halt initial public offers (IPOs) came a few hours after extraordinary announcements on Saturday by 21 major brokers and 25 big fund managers, which collectively promised to invest at least $US19 billion of their own money into stocks.
The 28 companies, 10 to go public in Shanghai and 18 in Shenzhen as planned, said they have adjusted their IPO schedule and would start to refund investors’ capital today, according to the announcements filed with the Shanghai and Shenzhen stock exchanges, Chinese government websites reported.
The chances of this move working are not good seeing an announcement last Tuesday that China’s big state-owned funds would be allowed to invest up to 30% of their assets (estimated at $US97 billion) in shares had no impact as the market continued to fall for the rest of the week.
Almost $US3 trillion in market value has been wiped from China’s markets since June 12 – that’s almost twice the GDP of Australia. It’s now seen as a bigger threat to many economies (Australia included) than the Greek crisis, especially if the market slide impacts the already weak level of domestic demand in China, and the faltering real estate sector.
The sell-off is especially worrying because the bull market had been built on speculative loans taken out to finance margin trading on the stockmarket by retail investors. Some analysts suggest total margin lending, both formal and informal, could add up to around 4 trillion yuan ($US3.6 billion). There are reported to be around 100 million Chinese investors in the stockmarket.
For Australia the thing to watch for is a sudden fall-off in interest by Chinese buyers in the Sydney and Melbourne real estate markets, and the emergence of big home unit developments being postponed and cancelled by their Asian sponsors (usually mainland Chinese property groups).
This will tell us the market crunch is drying up liquidity in China (that’s why the central bank has been pumping cash into China’s money markets for the past 10 days).
China’s top brokerages surprised on Saturday with an announcement that they would collectively buy at least 120 billion yuan ($US19.3 billion) of shares – a pledge that, according to the Wall Street Journal and the Financial Times, would form part of Beijing’s new stabilisation fund.
China’s securities regulator had already said on Friday it would cut the number of IPOs and other capital raisings to try and keep the stockmarket liquid (the IPOs and capital raisings drain money from the market and can be locked up for a year or more under Chinese regulations)..
In a statement on Saturday, the Securities Association of China expressed “full confidence” in the development of China’s capital markets and said the brokerages would jointly invest 15% of net assets as of end-June “or no less than 120 billion yuan” in blue-chip exchange traded funds (ETFs).
And the brokerages would not sell as long as the Shanghai Composite remained below 4,500 points. The index slumped 5.8% on Friday to end at 3,684 points.
Chinese websites said listed securities companies among the 21 brokerages also pledged to buy back shares, along with their major shareholders and The Asset Management Association of China said its members promised to hold their additional stock investments for at least a year and to also speed up the application and issuance of equity funds (whatever that means).
The Shanghai Composite Index dived 5.77% to finish at 3,686.92 points, falling below the psychological threshold of 4,000 points for the first time since April, taking the fall since the peak on July 28 to more than 28%.
The tech-heavy Shenzhen Component Index plunged 5.25% to close at 12,246.06 points, and the ChiNext Index, which tracks China’s Nasdaq-style small growth enterprises, lost 1.66%.
