Fox Hu and Kyoungwha Kim London
CHINA’S financial industry joined the nation’s securities regulator in moving to shore up the nation’s $7.7 trillion (R94.5 trillion) stock market, spurring the biggest rally in more than six years.
Money managers should avoid panic selling because a “structural rally is brewing,” the Asset Management Association of China said yesterday in a letter to its members.
Guotai Junan Securities, the country’s second-largest brokerage, said it would ease restrictions on margin trading. Investors should have “confidence” and ignore “irresponsible rumours,” China Securities Regulatory Commission spokesman Zhang Xiaojun said late on Monday, while the Ministry of Finance said it may allow the nation’s pension fund to invest in equities.
The announcements came after a weekend interest rate cut by the central bank failed to prevent the Shanghai Composite Index from entering a bear market on Monday. While Bank of America says state-led support for stocks will fail to spark a sustained rebound as margin traders unwind a record amount of leveraged bets, Macquarie Group says authorities have “drawn a line in the sand” and will act to prevent the Shanghai Composite from falling below the 4 000 level.
“Those rate cuts over the weekend would have normally been a very powerful way to boost the market and because they failed, they now have to really introduce some confidence back into their efforts,” Erwin Sanft, the head of China strategy at Macquarie, said. “We should continue to see them really defending the 4 000 point level.”
The benchmark stock gauge fell as much as 5.1 percent yesterday before jumping 5.5 percent to 4 277.22 at the close, the biggest intraday point swing since 1992.
Other measures the government can take to fight the steepest stock-market rout since 1996 include halting initial public offerings, reducing stamp duties or cutting lending rates, according to Bank of America strategist David Cui. A “vicious cycle” of margin calls could limit their impact, he said on Monday.
Margin debt on the Shanghai Stock Exchange fell for a sixth day on Monday to 1.36 trillion yuan (R2.69 trillion), the longest stretch of declines since June 2014, while the benchmark gauge’s 10-day volatility reading jumped to the highest since 2008. A five-fold surge in leveraged wagers had helped propel the Shanghai index to a more than 150 percent gain in the 12 months to June 12.
Continued declines in the Shanghai Composite, which tumbled more than 20 percent in two weeks to Monday, risk sparking social unrest, BMI Research said yesterday. Individual investors account for about 80 percent of trading on mainland Chinese exchanges.
Regulators are considering suspending IPOs in an attempt to stabilise the market. –
Bloomberg