Capping an extraordinary week of stock market losses that defied state intervention, China decided to double down on Saturday - hoping to avoid a “Black Monday” when trading resumes after the weekend.
Meeting in Beijing, 21 major brokerage houses said they would contribute 120 billion yuan - the equivalent of $19.3 billion - to purchase blue-chip “exchange traded funds” to stabilize the market, according to a statement Saturday by the Securities Association of China.
The announcement followed a week of moves by Beijing to stimulate stock prices and prevent a deeper rout that could reverberate through the slowing Chinese economy. Despite those measures, the Shanghai Composite Index dropped 5.77 percent on Friday, resulting in a weekly loss of 12.9 percent.
Overall, the Shanghai and Shenzhen stock indices have dropped 29 percent and 33 percent, respectively, since June 12. Shareholders have seen $2.8 trillion in market value disappear during that time.
Analysts in China are divided on whether government should be aggressively intervening in a market widely deemed to be “bubble” territory, with stock prices far exceeding company performance. From the start of the year to mid-June, the Shanghai and the tech-heavy Shenzhen benchmark indices rose 54 per cent and 118 per cent - far higher than all other stock exchanges worldwide.
Yet within China’s halls of power, there is much riding on keeping stock prices high. President Xi Jinping has been trying to transition China economy away from clusters of state-owned heavy industry to more diversified, entrepreneurial enterprises. But many of these old state-owned businesses have heavy debt, which Xi wanted them to pay down amid a bull market.
Beijing took numerous steps this week to prop up stock prices. It eased market trading rules, and let the stock exchanges cut trading fees by 30 percent. It also allowed investors to use real estate as collateral to gain loans for further investing, a move that could link China’s hot property markets to its equity fluctuations.
None of these measures stopped Friday’s slide. Soon after the markets closed, regulators said they would slow the pace of approving new IPOs, or stock offerings, which some investors had blamed for diluting the value of remaining shares.
On Saturday, the 21 brokerages met in Beijing and then issued a statement they had “full confidence” in the development of China’s capital markets. The brokerages said they would not sell off holdings as long as the Shanghai Composite Index is below 4,500 points.
As stock prices have collapsed, some government media pointed a finger at “foreign influences.” A cartoon published Tuesday by a state-owned website, thepaper.cn, showed an elderly Chinese woman thanking the government for intervening and blaming “foreign ghosts” for contributing to the crash.
On Thursday, China Daily reported that the China Securities Regulatory Commission had launched an investigation into “market manipulation,” particularly investors who use stock index futures to “short” the market. In other words, such investors are investing in indexes that pay off if the market drops a certain amount.
China’s various interventions seem to be winning support at home, but they could spook international investors who fear Beijing will perpetually attempt to rig share prices.
On Wednesday, prior to Beijing’s most recent actions, the World Bank released a report critical of China’s interference with its broader economy, not just its stock exchanges.
“Financial reform will only prove effective if it removes the distorted incentives and poor governance structures that have affected how financial resources are mobilized and allocated,” the report stated.