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China weighs RMB2 trillion stock market rescue package

Bloomberg
Bloomberg • 5 min read
China weighs RMB2 trillion stock market rescue package
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Chinese authorities are considering a package of measures to stabilize the slumping stock market, according to people familiar with the matter, after earlier attempts to restore investor confidence fell short and prompted Premier Li Qiang to call for “forceful” steps.

Policymakers are seeking to mobilize about 2 trillion yuan (US$278 billion), mainly from the offshore accounts of Chinese state-owned enterprises, as part of a stabilization fund to buy shares onshore through the Hong Kong exchange link, said the people, asking not to be identified discussing a private matter. They have also earmarked at least 300 billion yuan of local funds to invest in onshore shares through China Securities Finance Corp or Central Huijin Investment, the people said.

Officials are also weighing other options and may announce some of them as soon as this week if approved by the top leadership, the people said. The plans are still subject to change. The China Securities Regulatory Commission didn’t respond to a request for comment.

The deliberations underscore the elevated level sense of urgency among Chinese authorities to stem a selloff that sent the benchmark CSI 300 Index to a five-year low this week. Calming the nation’s retail investors, many of whom have been bruised by the protracted property downturn, is also seen as key to maintaining social stability.

A gauge of Chinese stocks listed in Hong Kong jumped as much as 3.8%, the most since Nov. 15, after falling to near-19-year lows on Monday. The onshore benchmark CSI 300 erased an earlier decline of 1% to edge higher. Both onshore and offshore yuan reversed earlier losses, while yields on the 10-year government bond rose one basis point to 2.5%. 

Whether such measures will be enough to end the rout is far from certain. The property crisis, depressed consumer sentiment, tumbling foreign investment and diminished confidence among local businesses after years of volatile policymaking are exerting strong downward pressure on both the economy and financial markets. Past efforts to shore up the stock market, most notably in 2015, proved insufficient at best and at times counterproductive. Authorities have also been reluctant to roll out major economic stimulus of the sort that many equity investors have called for.

See also: Singapore lawyers drawn to China as international peers retreat

At a State Council meeting on Monday, chaired by Li, China’s cabinet received a briefing on the operations of the capital markets as well as considerations for related work, according to an official statement, which didn’t provide more details on what Beijing is mulling. 

“This is a massive boost to confidence,” said Li Weiqing, fund manager at JH Investment Management Co. “The state council comments also affirm that the top policymakers are attaching high importance on this matter, but whether the gains can sustain after the buying or if people will sell into the rally, is hard to tell right now.” 

In all, more than US$6 trillion has been wiped out from the market value of Chinese and Hong Kong stocks since a peak reached in 2021, underscoring the challenge that Beijing faces as it seeks to arrest a decline in investor confidence. 

See also: China property crash is battering a niche pocket of ESG finance

China’s piecemeal moves in recent months to boost market sentiment were met with a large degree of despondency from traders, with some calling for more forceful stimulus. Beijing has restricted short selling and state funds stepped in to buy shares of big banks. The formation of a state-backed stabilization fund has been contemplated since at least October, though some raised doubts over its efficacy. 

Confidence in China’s markets has been hurt over the past years by President Xi Jinping’s growing control over private enterprise, which has included a crackdown on the country’s tech giants. International banks who were planning a massive expansion in the country are now tempering their ambitions to build platforms in the world’s second-largest economy. 

“The potential support package should be able to stem declines in the short term and stabilize markets into the Lunar New year, but state buying alone has historically had limited success in turning around market sentiment if not followed up by further measures,” said Marvin Chen, strategist at Bloomberg Intelligence.

During the 2015 rout, Beijing tapped China Securities Finance Corp as its main stabilization vehicle by allowing it to access as much as 3 trillion yuan of borrowed funds from sources including the central bank and commercial lenders. The money was used to buy stocks directly and provide liquidity to brokerages. Even so, the turbulence didn’t end until a year later.

This time, officials are seeking to use offshore money to minimize impact on an already weakening yuan, said the people.

China’s stock meltdown is adding pressure on so-called snowball derivatives, which are structured products that promise bond-like coupons as long as the underlying assets trade within a certain range. The CSI Smallcap 500 Index, a pricing reference for some of these products, slipped 4.7% on Monday, taking it below an earlier estimated threshold that may trigger widespread losses on the snowballs.

The nation’s largest brokerage Citic Securities Co. last week stopped short selling services for some clients after so-called window-guidance from regulators, Bloomberg has reported.

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