China ramps up policy response as panic grips stock market

Investors viewing stock information at a brokerage house in Shanghai on July 8.
Investors viewing stock information at a brokerage house in Shanghai on July 8. PHOTO: REUTERS

BEIJING (BLOOMBERG) - "You're gonna need a bigger boat," one of the main characters in the movie "Jaws" said when he glimpsed the three-ton shark they were hunting.

Echoing that sentiment, China's policy makers are up-sizing their response to an equities rout that's erased US$3.5 trillion (S$4.75 trillion) in value after measures so far failed to quell investor panic.

In the latest development, state-backed China Securities Finance Corp. is seeking at least 500 billion yuan (S$109 billion) in liquidity to support the stock market, according to people familiar with the matter. It's aiming to raise funds from the People's Bank of China and the interbank market, according to the people, who asked not to be identified because the move hasn't been made public. The final amount has yet to be set and may be far higher, according to the people.

The PBOC said Wednesday it will provide ample liquidity to the company, joining other arms of the government in measures to stem the selling. The Shanghai Composite Index fell as much as 8.2 per cent Wednesday, paring the loss to 3.9 per cent at the lunch break.

"The central bank must do whatever it can to stabilize the market; that should be the top priority," said Shen Jianguang, the chief Asia economist for Mizuho Securities Asia Ltd. in Hong Kong. Providing liquidity to China Securities Finance will help, but it's indirect and not enough, said Shen, who previously worked at European Central Bank and the International Monetary Fund.

"The PBOC should cut interest rates, it should cut banks' required reserve ratio, it should set up a stabilization fund," said Shen. "Confidence is key. There will be catastrophic results if confidence is shattered."

He cited a hit to household wealth and threats to financial stability if the selling continues.

The central bank will "actively assist China Securities Finance Co. to obtain ample liquidity," through channels including loans and bonds, according to the central bank's statement. The PBOC will pay close attention to market moves and do whatever it can to prevent systemic risks, it said.

The PBOC didn't respond to a faxed request for comment on whether China Securities was seeking funds.

China Securities has started a short-term note issuance process and has ample liquidity, it said in a statement on its website Wednesday.

"The huge volatility in the equity market has become an increasing concern for policy makers," said Zhao Yang, chief China economist at Nomura Holdings Inc. in Hong Kong. "Should the equity market collapse, many reform plans could be affected.

"The PBOC's statement is helpful to stabilize sentiment a little. But the government may need to consider more aggressive rescue measures to stabilize the sell-off."

Such measures could include the mobilization of 1 trillion yuan from the Ministry of Finance to directly support the stock market, and further reductions to benchmark interest rates and banks' required reserve rations, Zhao said.

China's benchmark stock index has lost more than 30 per cent in less than a month. At least 1,249 companies have halted trading on mainland Chinese exchanges, accounting for 43 per cent of total listings. The suspensions have locked up a minimum US$2.2 trillion of shares, or 33 per cent of China's market capitalization, according to data compiled by Bloomberg.

Policy makers are worried the rout will shake overall financial stability, dent household wealth and consumption, UBS Group AG economists wrote in a note.