SHANGHAI — The increasingly frantic attempts by Chinese authorities to stem a stock market rout were finally rewarded yesterday as Chinese shares staged their best one-day gain in six years, but analysts warned the costs of heavy-handed state intervention are likely to weigh on the market for a long time.
The benchmark Shanghai Composite Index jumped 5.8 per cent, the most since 2009, to close at 3,709.33 after a choppy trading session where it had fallen as much as 3.8 per cent. About 600 stocks rose by the daily 10 per cent limit but trading in another 1,439 companies were halted on mainland exchanges, locking investors out of 50 per cent of the market.
The Chinese rebound helped to lift sentiment elsewhere in the region, with Hong Kong’s Hang Seng Index surging 3.7 per cent and Japan’s Nikkei-225 Index rising 0.6 per cent, although Singapore’s Straits Times Index closed 0.5 per cent lower.
Chinese authorities have unveiled market-boosting measures almost every night over the past two weeks to reverse the rout in the world’s second-largest stock market as leveraged investors dumped shares amid margin calls. The rebound came after China Securities Regulatory Commission (CSRC), in its most drastic step yet to arrest the slump, said late on Wednesday that shareholders of more than 5 per cent of a company’s stock would be barred from selling for the next six months.
The CSRC, which warned of panic gripping a market dominated by ordinary retail investors, said it would deal severely with shareholders who violated the restriction. The banking regulator said separately it would allow lenders to roll over loans backed by stocks. And in the latest salvo against short sellers, who bet on falling prices, police investigated suspected “malicious” selling of shares, official news agency Xinhua reported.
“The authorities are capable of slowing the selling and extending market support,” said Mr Mark Konyn, chief executive at Cathay Conning Asset Management in Hong Kong. “However, this high level of intervention comes at a significant cost. Such intervention locks up ownership of shares, reduces liquidity and creates an overhang that could plague the market for years.”
More than 25 per cent, or nearly 25 trillion yuan (S$5.4 trillion), has been knocked off the value of Chinese shares since mid-June, and for some global investors the fear that China’s market turmoil will destabilise the financial system is now a bigger risk than the debt crisis in Greece.
“We are inclined to believe that Beijing will escalate policy responses until they start working,” Credit Suisse economists said in a research note.
“If market conditions do not stabilise, we expect a statement of ‘whatever it takes’ from the Chinese government, given that social stability is at stake and financial systemic risks are evident,” they added.
The plunge in China’s previously booming stock markets, which had more than doubled in the year to mid-June, has created a major headache for President Xi Jinping and China’s top leaders, who are already grappling with slowing growth.
Beijing, which had made handing a decisive role to the market a centrepiece of its economic reforms, has responded with a battery of support measures, including an interest rate cut, suspension of initial public offerings and enlisting brokerages to buy stocks, backed by cash from the central bank.
“The government will be able to stabilise the market because they have a lot of tools in the toolbox. But it is concerning that the Chinese government doesn’t allow market forces to work, and that’s something China must change over time,” said Mr Christopher Moltke-Leth, head of institutional client trading at Saxo Capital Markets.
COLUMN: “It is far from calling it a victory for the rescuers as more than half of listed companies are not trading in the market.” - Mr Du Changchun, analyst at Northeast Securities in Shanghai.
Chinese stocks head for biggest two-day rebound since 2008
SHANGHAI — Chinese stocks rose, capping the benchmark index’s biggest two-day gain since 2008, as unprecedented government intervention helped curb an equity rout that erased US$3.9 trillion (S$5.3 trillion) in less than a month.
The Shanghai Composite Index rallied 4.5 per cent to 3,877.80 at the close, adding to yesterday’s (July 9) 5.8 per cent surge. With more than 1,300 companies still halted on mainland exchanges, trading was limited to 53 per cent of the market. About 90 per cent of stocks that did trade soared by the maximum 10 per cent. The rebound helped the gauge climb 5.2 per cent this week after tumbling to three-month lows on Wednesday.
Official measures to support shares became more extreme during the week as declines deepened. They include a ban on stockholders and executives from selling stakes in listed companies for six months, an order for companies to buy equities and an investigation by the nation’s public security bureau into short-selling. Even as stocks rebounded, foreigners have been net sellers of Shanghai shares every day this week, while local investors continued liquidating bullish bets on the exchange yesterday.
“The measures introduced by the authorities needed some time to have an effect on the market and they have finally started to show results,” said Mr Gerry Alfonso, a sales trader at Shenwan Hongyuan Group in Shanghai. Stock halts will continue for “some time” as “companies and regulators clearly want to have them coming back to trading without impacting the overall market.”
President Xi Jinping’s government is deploying the heavy hand of the state to prevent falling stock prices from eroding confidence in his leadership. China now has more than 90 million individual investors, outnumbering members of the Communist Party.
More than 1,300 companies rose by the 10 per cent daily limit on the Shanghai and Shenzhen exchanges today. Gauges of industrial, consumer staple and health-care stocks jumped more than 7 per cent on the CSI 300 Index, which gained 5.4 per cent. The Hang Seng China Enterprises Index advanced 3.6 per cent in Hong Kong. The Hang Seng Index added 2.1 per cent.
The rebound pared losses by the Shanghai Composite since its June 12 high to 25 per cent. While the median price-to-earnings ratio in China has dropped to 57 from 108 at the height of the rally, valuations are almost three times as high as those on the Standard & Poor’s 500 Index.
Fidelity Investments, which oversees the largest China funds outside of the mainland, says Chinese stocks are a buy following the sell-off.
“As far as the fundamentals are concerned, we are actually quite confident,” Mr Robert Bao, a Hong Kong-based money manager at Fidelity, which oversees more than US$2 trillion globally, said in a telephone interview. “We are fully invested.”
Bank of America said the market is now dependent on the state.
There is a decent chance of “another leg down” for stocks within the next few months when the government starts to withdraw its support in terms of liquidity, Mr David Cui, Bank of America’s head of China equity strategy, said on a conference call today. Unless the government keeps pushing the market higher, selling pressure will probably “stay relentless” because of leverage, he said.
Margin traders cut holdings of shares purchased with borrowed money for a record 14th day on the Shanghai Stock Exchange yesterday. The outstanding balance of margin debt on the nation’s two bourses has dropped by US$132.6 billion from the peak on July 8 to US$232.6 billion through Wednesday.
A five-fold surge in margin debt over the 12 months through June 12 had helped propel the Shanghai index to a more than 150 per cent gain.
Foreigners sold shares through the city’s exchange link with Hong Kong on Friday, extending a record four-day outflow, according to data compiled by Bloomberg.
Greece ‘A Sideshow To China Meltdown,' Ex-BMO Chief Economist Says, And Canada Will Feel Impact
Many observers of China's economy have been alarmed, or at least taken by surprise, by the central government’s aggressive response to the stock price crash. China’s securities regulator is throwing 120 billion yuan ($24.5 billion Cdn) into the stock market through a network of brokerages, in order to shore up stock prices. And in a very unusual move, the Chinese government has actually set a target number for the Shanghai Composite Index: It wants to see it rise to 4,500, from current trading levels below 4,000.
“They are trying to stop the plunge, but this is clearly the wrong way to do it,” Teng Bingsheng, associate dean at Beijing's Cheung Kong Graduate School of Business, told Bloomberg. “The Chinese stock market is already the most manipulated in the world. It’s an overheated market and you can’t stop people from selling.”
Unlike the U.S.’s Troubled Asset Relief Program (TARP) during the 2008-09 crisis, China isn’t trying to rescue companies, it’s trying to rescue stock prices, Anne Stevenson-Yang, founder of J Capital Research, told Quartz.
TARP “focused on the viability of operating companies” and not on the “optics” of a stock market index, Stevenson-Yang said. “There is no way to characterize these measures other than as a ‘double or nothing’ wager.”
Indeed it does seem to be a case of Chinese policymakers doubling down on a strategy, because the country's stock market bubble was the result of policy.