China said to intervene in stock market after S$840b rout

Investors at a stock firm in Fuyang on Jan 4.
Investors at a stock firm in Fuyang on Jan 4. PHOTO: AFP

SHANGHAI (BLOOMBERG, REUTERS) - China moved to support its sinking stock market as state-controlled funds bought equities and the securities regulator signaled a selling ban on major investors will remain beyond this week's expiration date, according to people familiar with the matter.

Government funds purchased local stocks on Tuesday (Jan 5) after a 7 per cent tumble in the CSI 300 Index on Monday triggered a market-wide trading halt, said the people, who asked not to be identified because the buying wasn't publicly disclosed. Additionally, the China Securities Regulatory Commission (CSRC) asked bourses verbally to tell listed companies that the six-month sales ban on major stockholders will remain valid beyond Jan 8, the people said.

The moves suggest that policy makers, who took unprecedented measures to prop up stocks during a summer rout, are stepping in once again to end a selloff that erased US$590 billion (S$840.2 billion) of value in the worst-ever start to a year for the Chinese market. Authorities are trying to prevent volatility in financial markets from eroding confidence in an economy set to grow at its weakest annual pace since 1990.

The sales ban on major holders, introduced in July near the height of a US$5 trillion crash, will stay in effect until the introduction of a new rule restricting sales, the people said. Listed companies were encouraged to issue statements saying they're willing to halt such sales, they said.

The CSRC didn't immediately respond to a faxed request for comment.

The CSI 300 rose 0.7 per cent at 1:07 pm local time. Stocks fell more than 2 per cent in early trade, prompting fears that exchanges were set for a second day of panic selling after a 7 per cent dive on Monday set off a new "circuit breaker" mechanism, suspending trade nation-wide.

But China's central bank injected a massive US$20 billion (S$28.5 billion) in cash through open market operations on Tuesday morning, and forex traders said it also intervened to stabilise the sliding yuan, which some blamed for aggravating Monday's slump.

The CSRC also said it was considering more restrictions on share sales by major shareholders, a major concern for small investors. The lockup on an estimated 1.2 trillion worth of shares held by major institutions, imposed as a stability measure during last summer's market crash, is set to expire next Monday.

Major Chinese brokerages and asset management firms spent vast sums to buy up shares during the crash in a state-coordinated rescue that Goldman Sachs estimated at the time to have cost around US$138 billion.

The CSRC also said it would further improve the circuit breaker mechanism after some analysts blamed the tool for inadvertently fueling the sell-off.

Monday's plunge threatened Beijing's six-month campaign to restore confidence in stock markets since the summer crash, which saw indexes lose as much as 40 per cent in a few weeks.

However, long-term success is far from assured, analysts and investors warned.

Repeated and often heavy handed interventions by Beijing have kept stock valuations at what many consider excessively high given the slowing economy and falling corporate profits.

"We've been waiting for a market drop like this for a long time," said Samuel Chien, a partner of Shanghai-based hedge fund manager BoomTrend Investment Management Co. "The economy is poor, stock valuation is still high, and the yuan keeps sliding, showing capital outflows are accelerates. The market drop is overdue."

Market reforms put on hold by the crash could be delayed further if the circuit breaker fails to calm markets - which had rebounded over 25 per cent from August lows prior to Monday.

A further sell-off could prompt regulators to freeze IPOs again, extend the share lockup to prevent more selling and keep the "national team" of brokerages and asset managers on the hook to keep buying and holding stocks at a loss.

It could also further dent confidence in the China Securities Regulatory Commission and in the wider financial regulatory framework to manage increasingly complex markets even as China's economy struggles against major headwinds.

The experience has further rattled some retail investors - who dominate transactions on Chinese exchanges.

"I think the circuit-breaker system is useless, the market will slump anyway," said Zhou Junan, a 22-year-old retail investor, who said he's holding back from buying stocks until later in the year.