Investors monitoring stock market movements at a brokerage house in Shanghai.  With the benchmark Shanghai stock index falling more than 30% in less than a month, wiping out around $3.2tn of value, Chinese government officials have cobbled together rescue measures aimed at propping up the market.  

Bloomberg/Beijing


China’s policymakers are up-sizing their response to an equities rout that’s erased $3.5tn in value after measures so far failed to quell investor panic.
Among the latest developments, state-backed China Securities Finance Corp is seeking at least 500bn yuan ($81bn) 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 central bank said yesterday 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 5.9% amid a record unwinding of margin trades.
“The PBoC’s statement is helpful to stabilise sentiment a little – but the government may need to consider more aggressive rescue measures to stabilise the sell-off,” said Zhao Yang, chief China economist at Nomura Holdings in Hong Kong. “Should the equity market collapse, many reform plans could be affected.”
Further measures could include the mobilisation of 1tn 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.
In a rolling series of announcements by at least four different entities, officials announced measures to rein in the slide. Before the market opened, the margin requirement for sell orders on a futures index was raised. The main securities regulator said separately that China Securities Finance would buy more shares of smaller-capitalised companies.
The reaction: the market opened with an 8% drop.
At about the same time, the central bank’s statement landed saying that it would support China Securities Finance, a body created by China’s cabinet in 2011 to provide margin financing to securities companies. The PBoC will pay close attention to market moves and do whatever it can to prevent systemic risks, it said.
Then the news about China Securities seeking liquidity broke. The PBoC didn’t respond to a faxed request for comment.
“The central bank must do whatever it can to stabilise the market,” said Shen Jianguang, the chief Asia economist for Mizuho Securities Asia in Hong Kong. Providing liquidity to China Securities Finance will help, but it’s indirect and not enough, said Shen, who previously worked at the European Central Bank and 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.
By late morning, another regulator loomed into view: the overseer of state-owned enterprises told companies administered by the central government not to cut holdings of stocks of their listed companies.
At least 1,300 companies have halted trading on mainland Chinese exchanges, locking up $2.6tn of shares, or about 40% of the market’s capitalisation. That followed recent moves including stock purchases by state-directed funds, a freeze on initial public offerings, and an interest-rate cut and reduction to the amount of cash banks must set aside in reserve.
And yet the selling continues: Traders cut 98.3bn yuan worth of shareholdings purchased with borrowed money on the Shanghai exchange on Tuesday, an 8.5% drop from the previous day that was the biggest on record. A five-fold surge in leveraged wagers had helped propel the Shanghai index to a more than 150% gain in the 12 months through June 12.