Chinese officials, brokerages and funds are taking drastic measures to save the falling stock market.
China’s stock market is experiencing the most serious crisis since 1992. By July 3, within only 14 working days, the gauge Shanghai Composite Index plunged nearly 30% from its peak on June 12th, and over $2.8 trillion of value has vanished from the market, bringing a dramatic end on to China’s 935-day bull market, the longest in the country’s history.
Over the last 12 months, Shanghai stock market surged more than 150%, as investors believed that China’s economy would be revived by monetary stimulus. In June, analysts of the industry warned of a bubble: the median stock on mainland exchanges was valued at about 82 times earnings, much higher than a multiple of 21 for the U.S.
Margin trading crisis
More seriously, the drop in stock prices has triggered fears of a market collapse, as leveraged traders are unwinding at a record pace.
The previous bull market was partly fuelled by margin trading, a market practice whereby investors borrow debt to invest in stocks, which magnifies both profits and losses. Debt incurred this way has risen almost fivefold over the past year to about two trillion Yuan ($322 billion) last month.
Not only could the saving of millions of small-time investors be wiped out, but the country’s banking system could also suffer more losses, as many borrowers have taken out loans using stocks as collateral. At a time when bad-loan levels are already high, Chinese banks are more fragile than ever.
Regulators in action
Faced with the crisis and concerned by potential forced liquidations and panic selling, Chinese regulators are taking urgent action to stabilize the market.
On June 27, the central bank cut both its benchmark interest rates and the amount of reserves certain banks are required to hold, while margin-trading rules were relaxed and transaction fees were lowered on July 1. China Securities Regulatory Commission (CSRC) has also pledged to examine recent market manipulation activity.
Moreover, the government is considering reducing the stamp tax, and the national pension fund and foreign investment are likely to be allowed to invest in the market.
28 IPOs suspended
So far all the attempts to shore up Chinese equities have failed to restore confidence of the market, but government urged the nation’s institutions and 90 million individual investors to stay patient, rational and confident.
Last Saturday, the State Council of China ordered the suspension of Initial Public Offerings (IPOs) of 28 companies on the Shanghai and Shenzhen stock exchanges in a bid to preserve liquidity in an increasingly volatile market.
It is still unclear how long the freeze will last. From 1994 to 2013, China’s A-share stock market had 8 IPOs suspensions, whose duration ranged from two months (2001) to fourteen months (2012 to 2013).
$19.3 billion to save market
Meanwhile, Chinese brokerages and funds are also actively mobilized.
The same day of the suspension of IPOs, a group of 21 brokerage firms, led by Citic Securities Co., announced their decision to invest the equivalent of 15% of their net assets as of the end of June, or no less than 120 billion Yuan ($19.3 billion) in total, to set up a market-stabilization fund investing in exchange-traded funds of highly capitalized stocks.
25 mutual funds, including China Asset Management Co. and E Fund Management Co., also promised to invest “actively” in stock funds and hold them for at least one year, according to a statement on Asset Management Association of China’s official website.
Since China entered into the bear market on June 29, announcements of market supportive measures were made almost every day. After the stimulus from different parties last weekend, it remains to be seen whether China’s stock market could survive its current crisis.