Govt heads off stock market meltdown

Analysts say recovery could take longer than expected

China's equities market has shown signs of stabilization after the government adopted an unprecedented series of measures to stem a massive sell-off. But analysts have warned the market may be prone to greater volatility before gaining a solid footing.

The benchmark Shanghai Composite Index has rebounded by 8 percent from the recent bottom. But the high fluctuations in mid-July indicate the market recovery could take longer than expected, as illegal leveraged funds have been wiped out and investors with fresh cash are taking a wait-and-see approach.

China's stock market has been on a roller-coaster ride, with the benchmark index witnessing a 30 percent plunge that erased nearly $4 trillion of market value after a rally of 150 percent that peaked mid-June.

The massive sell-off was triggered by the forced liquidation of margin accounts, which allow investors to borrow money to purchase stock. Investors' share dumping was also exacerbated by the securities regulator's investigation into gray market financing, which offered investors up to 10 times their initial capital to trade stocks.

To prevent a market meltdown, the central government, the securities regulator and financial institutions have waged a concerted campaign to lift the market on fears that a market crash could threaten the country's entire financial system.

The People's Bank of China has vowed to provide liquidity to the state-owned margin lender China Securities Finance Co Ltd to improve the securities brokerages' capital position.

The China Securities Regulatory Commission has suspended the offerings of new shares and banned major shareholders of listed companies from selling their holdings for six months.

In the meantime, the country's top 21 securities brokerages have pledged to collectively invest 120 billion yuan ($19.3 billion) in exchange-traded funds that track large blue chip stocks.

The Ministry of Public Securities also took action to crack down on market manipulation through short selling stock index futures.

Economists said that if not properly contained the stock market rout could have a detrimental impact on the country's financial stability and the overall economy.

"Whether the government can prevent a systemic financial crisis from happening will have a direct impact on China's effort in financial innovation," said Guan Qingyou, executive director of the research institute at Minsheng Securities.

"It also matters for social stability and the country's overall economic development," Guan said.

Some analysts said that the recent market turmoil may be a hard-learned lesson for regulators and investors and may lead to a more cautious attitude by Beijing toward the country's financial innovation and liberalization.

Lu Ting, chief economist at Huatai Securities Co Ltd warned that government contingent measures may run the risk of eroding investors' confidence in the government's efforts to push capital market reform and opening up.

The previous bull run had not been fueled so much by improved economic fundamentals and corporate profitability as by ample liquidity and investors' anticipation of comprehensive economic reforms, Lu said.

"So the key is to restore market confidence and convince investors that the reform will continue," Lu said, adding that the government should resume its role as a referee and give way to market functions once the systemic financial risks are contained.

There are also rising concerns by overseas investors that the latest tough government intervention to stem the market slide may affect the international accessibility of the A-share market and impede the opening-up process of China's capital market.

On July 15, foreign investors continued to be net sellers of Chinese shares through the Shanghai-Hong Kong Stock Connect for an eighth consecutive day. Offshore investors have reduced total holdings by $7.1 billion through the trading link since July 6, the Financial Times reported.

lixiang@chinadaily.com.cn