China's bailout must have 'proper' exit: experts

BEIJING - China has taken measures to steady the stock market but questions have arisen over how to properly exit the new regime at a prudent time, when the market returns to normal.

Zhao Xijun, deputy director of the finance and securities institute at Renmin University of China, expects the government to wait until liquidity, investor confidence and the fund-raising function of the equity market are back on track.

Only then could withdrawal of the stabilizing measures be described as "prudent." Not only should the timing be prudent, but the exit must be conducted "in batches" and "properly," he said.

Economist Shi Jianxun of Tongji University explained that it is common practice for governments to intervene if the capital markets faces systemic risk. Even in the United States, authorities resorted to bailout policies when Lehman Brothers collapsed.

Bailout measures can steady a market, but wholesale adjustments to China's stock market are obviously required if reliability and stability are to be assured. In any case, stock markets only function efficiently when the real economy is sufficiently healthy, said Yi Xianrong of the Chinese Academy of Social Sciences.

The country was taken by surprise by a stock market plunge of more than 30 percent from the June 12 peak, but the freefall must be balanced against the staggering gains of China's various indexes over the past year, especially since the beginning of 2015.

To prevent market upheavals from threatening overall financial stability, the government has poured in funds and restricted futures trading on a major small-cap index.

The central bank has repeated its commitment to meeting the liquidity needs of the China Securities Finance Corporation Limited, the only institution permitted to finance margin trading.

The policy support has, to some extent, restored market confidence, with the key index rising for several days after the concerted moves.

Regarding the impact of the stock market on the broader economy, Nomura research said the equity market sell-off will have a "small" negative effect on the real economy and the risk of a financial crisis is limited.

China's growth data for the second quarter will be released on Wednesday.