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China Stocks Tumble 8.5%, Calling Into Question Beijing’s Market-Rescue Effort

Discussion in 'China & Far East' started by Anees, Jul 29, 2015.

  1. Anees


    Apr 22, 2012
    +1 / 1,585 / -3
    Chinese shares suffer their biggest one-day percentage drop in more than eight years


    LINGLING WEI in Beijing and

    CHAO DENG in Hong Kong
    Updated July 28, 2015 2:47 p.m. ET
    The Chinese government is struggling to contain the collapse of a stock-market rally it helped engineer, announcing late Monday that it will step up its purchases of shares to prop up sagging indexes.

    Chinese shares suffered their biggest one-day percentage drop in over eight years Monday, wiping out hundreds of billions of dollars of market value and putting an end to a three-week period of stability Beijing had achieved by intervening with stock purchases and other steps to stop the market’s slide.

    The Shanghai Composite Index, which includes China’s biggest companies, fell 8.5%, to 3725.56, with the losses coming mostly during a hectic last two hours of trading on Monday. More than two-thirds of the 1,114 companies in the index fell by the 10% daily maximum allowed under market rules. The smaller Shenzhen Composite Index fell 7%, to 2160.09, bringing its losses to 31% since it hit a record in mid-June. Tuesday morning, in early trading, Shanghai shares fell 4.2% and Shenzhen shares fell 4.3%.


    The big declines show investors have become skeptical of the market and the government’s ability to control its slide. China’s top leaders, currently gathering for their annual summer talks at the northern seaside town of Beidaihe, will likely look at what further action they can take to bring stability back to the stock market and how to prevent the rout from spreading to other parts of the economy.

    This week the Shanghai Composite erased most of the gains made since authorities in Beijing intervened in stock markets in early July. What changed to spark the selloff? Photo: Getty


    “The cat is out of the bag when it comes to China, and the collapse in the stock market overnight has confirmed that Beijing’s stabilization policies are not working,” said David Madden, market analyst at brokerage IG. “I feel that confidence will be difficult to get back, no matter how much money they throw at it.”

    For now, the problem is largely a domestic one for China. Shares in Asia, Europe and the U.S. also pulled back, but the relatively limited exposure among international investors to Chinese stocks kept the panic from spreading.

    Japan’s Nikkei Stock Average fell 0.9%, the Stoxx Europe 600 closed down 2.2%, its biggest one-day percentage decline in a month, while the S&P 500 slumped 0.6%. Commodities, including crude oil and copper, dropped amid fears about waning demand from China. In early trading Tuesday, Japan shares were down 1%, and Hong Kong shares were down 0.8%.

    A spokesman for China’s top securities regulator said late Monday night that thegovernment will increase its buying of stocks in a bid to stabilize the market. The comments appeared to be aimed at speculation the government could soon pull back on its support for the market, speculation that had contributed to the day’s big losses.


    China’s Market in 8 Charts


    Zhang Xiaojun, spokesman at the China Securities Regulatory Commission, said the government’s stock-buying entity didn’t exit the market and will increase its holdings of stock as appropriate. He also said the regulator isn’t ruling out the possibility that big individual investors were coordinating to dump shares in a “malicious” fashion that contributed to Monday’s plunge.

    Further intervention by the government could raise more concerns about Beijing’s resolve to open up its financial system to greater competition and cross-border capital flows, a stated government goal as the leadership seeks to turn the Chinese yuan into an international currency. Current and retired Communist Party officials are expected to discuss the next course of action for overhauls at the conclave in Beidaihe, according to government advisers.

    Despite slowing economic growth, China’s stock market soared in the first half of the year—the Shanghai Composite had climbed 60% this year through mid-June—fanned by policy changes that made it easier to buy shares with borrowed money and upbeat editorials in state-run media. Many of the buyers have been individual investors, who account for about 80% of the transactions in China’s stock market, a far greater share than in developed markets.

    Beijing has hoped that the country’s stock market would become a reliable venue for companies to raise capital, reducing their dependence on funding from state-owned banks. More recently, though, fears of a collapse in investor confidence have come to the fore.

    “As Wen Jiabao once put it, ‘Confidence is more important than gold,’ ” one government adviser said, referring to a former Chinese premier. “That’s the state of mind for the current leadership as well.”

    The stock rally this year had been one of the few bright spots in China’s economy. The intervention to rescue the market suggests leaders are concerned not only that the disorderly selling could spread to other parts of the financial system, but that it could signal a wider loss of faith in the government’s ability to manage the economy.

    Some economists question the wisdom of the all-out effort to protect stocks, saying that risks of significant damage to China’s broader economy are small. One reason, they said, is that much of Chinese household wealth sits in banks and is tied up in real estate, with only a small portion invested in stocks.

    The market-rescue measures could mean more harm down the road, they said, by reinforcing the idea that the government will come to the rescue whenever there is a crisis, undermining the progress China has made in allowing more room for risk in its financial system.

    Since early July, the Chinese government has resorted to measures aimed at stemming the slide in stocks that had wiped out roughly $3 trillion in market value in just three weeks beginning in mid-June. The steps, including a stock-purchasing program financed by the country’s central bank and commercial banks and a halt to new stock listings, helped restore some calm in the following weeks.

    Monday’s plunge all but wiped out the market’s gains since the recent market trough on July 8. The Shanghai Composite is down 28% since hitting a more than seven-year high on June 12. Among stocks falling by the 10% daily limit Monday were those of major state-owned companies such as oil firm China Petroleum & Chemical Corp., insurer China Life Insurance Co. and Bank of Communications Co., one of China’s top banks. Still, the Shanghai Composite is up 15% this year, while the Shenzhen Composite has gained 53%.

    There was little sign of market panic early Monday. Stocks initially rose before finishing the morning session at 11:30 a.m. down slightly from Friday’s closing level. When trading reopened at 1 p.m. after the normal daily break, they traded within a narrow range until 1:49 p.m., when the steep slide began.

    Investors look at stock information at a brokerage house in Qingdao, Shandong province, on Monday. China stocks plunged 8.5%, their biggest one-day percentage drop in more than eight years. PHOTO: REUTERS


    Dai Yiyun, a 28-year-old office secretary at a state-owned company in Shanghai, saw her stockholdings shrink in value within the half-day of volatile trading. At 2 p.m., four of the 10 stocks in her portfolio had gained during the day. By 2:15 p.m., all of them had fallen by the 10% maximum.

    “I never expected the market to turn 180 degrees around early afternoon,” said Ms. Dai, who lost 10,000 yuan ($1,611) on Monday. “I’ve lost hope that I can make money in this crazy market…Logic simply doesn’t exist in China’s stock market.”

    Beijing helped bolster the market about a year ago by easing credit conditions, which in turn encouraged investors to buy shares with borrowed funds, known as margin trading. More access was granted to foreign investors via a trading link to the Hong Kong market. Chinese stocks more than doubled in value in a year.

    But China’s stock-investing public rushed for the exits starting in mid-June, when the government intensified a clampdown on margin trading.

    Outstanding margin loans were at 1.5 trillion yuan Friday, down from a record of 2.3 trillion on June 18, according to the latest available information from data provider Wind Information Co. Analysts said unofficial lenders, such as peer-to-peer Internet financing sites, have lent hundreds of billions of yuan more to investors.

    In recent weeks, China’s securities watchdog has been cracking down on such lightly regulated credit providers. In a statement after the market closed Monday, China’s securities regulator said it had sent enforcement teams to two companies that run stock-trading platforms to check if they are following its rules.

    Analysts said Beijing still has firepower to support the market. China’s central bank, which has already been indirectly injecting funds to help securities firms buy shares, could further increase funding.

    Chinese authorities could also delay unwinding the existing rescue measures for as long as needed, by potentially prolonging the suspension of new stock sales and continuing to mandate that anyone holding 5% of a company can’t sell shares for six months. Meanwhile, the Finance Ministry could pitch in by lowering the stamp duty on stock sales, Chinese officials said.

    “The [government’s] hope is to get the stock market back up long enough for economic growth to catch up, which would then enable it to carry out its pledged structural reforms to make the growth more sustainable,” said economist Zhu Chaoping at UOB Kay Hian Holdings Ltd., a Singapore-based brokerage.

    Others found the apparent lack of government intervention Monday telling.

    The authorities may want to “test whether the market has recovered its resilience,” said Fu Xuejun, a strategist at Huarong Securities. “The government wants to use state funds to stabilize the market, not to prop it back to 5,000 points overnight.”

    —Yifan Xie
    and Gregor Stuart Hunter
    contributed to this article.

    China Stocks Tumble 8.5%, Calling Into Question Beijing’s Market-Rescue Effort - WSJ
  2. Aepsilons

    Aepsilons ELITE MEMBER

    May 29, 2014
    +118 / 35,753 / -0
    United States
  3. LeveragedBuyout

    LeveragedBuyout SENIOR MEMBER

    May 16, 2014
    +60 / 3,066 / -0
    United States
    United States
    As I said in the other thread, I don't write long posts anymore, so to keep this short:

    1) When short-sales are banned, owners of 5%+ of a company are forbidden to sell, IPOs are forbidden, 50% of float is suspended from trading, and the government orders banks and brokerages to buy--can we still call this a market?

    2) What happens when the government withdraws its support? Investors are already wary of the market given the regulator's incompetence, will they expect the government to step in every time there is a correction, now? This is the slippery slope of moral hazard, and it will only deepen mistrust of the government.

    3) What happened to Xi's plan to increase the role of market forces in China's economy? Not only is financial liberalization further away than before, the government now directly owns more companies than before, both of which are counter to Xi's stated goals. Xi was supposed to build political capital with his anti-corruption drive that he could spend on economic restructuring, but now the political capital is wasted, and the restructuring is further away than ever.

    It wasn't good for the US to intervene, and it's not good for China, either.