China to prop up stock market after record fall

Government to unleash more funds after stocks plummet 8.5 percent in biggest one-day collapse in eight years.

China's strategy to prop up its shares has included a police crackdown on short-selling and a six-month ban on big shareholders selling holdings [AFP]

China will unleash more funds to stabilise its share market after Shanghai stocks posted their biggest one-day plunge in more than eight years, state media says.

State-backed China Securities Finance Corporation (CSFC), which has reportedly already pumped billions of yuan into mainland equities under a government plan, will continue to buy stocks, the Xinhua state news agency reported.

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The announcement was made to dispel “rumours that the national margin trading service provider has backed off from stabilising the stock market”, Xinhua said, citing a spokesman for the China Securities Regulatory Commission, Zhang Xiaojun.

The securities regulator also said authorities would crack down on anyone who engages in “malicious shorting of stocks” in Beijing’s latest attempt to stave off a full-blown market collapse.

Chinese shares slumped almost 8.5 percent on Monday, their biggest fall in a single session since February 2007, after weak economic data revived fears about the health of the world’s second-largest economy.

Investors were also unsettled by reports that the CSFC had started to return funds it borrowed from commercial banks to stabilise the stock market ahead of schedule, sparking fears that Beijing’s commitment to the market may be flagging.

“The rise during the past two to three weeks was too big, so the market needs to correct itself,” Zhang Qi, an analyst from Haitong Securities, told AFP.

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“There is also uncertainty about how the government support measures will exit the market,” he said.

The Shanghai Composite Index closed down 345.35 points to 3,725.56 on turnover of 721.3 billion yuan ($117.9bn).

The Shenzhen Composite Index, which tracks stocks on China’s second exchange, slid 7.00 percent, or 162.62 points, to 2,160.09 on turnover of 667.7 billion yuan.

Selling ‘banned’

Chinese authorities have unleashed an unprecedented government rescue plan to prop up shares in recent weeks that has included a police crackdown on short-selling and a six-month ban on big shareholders selling stocks.

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The moves had been credited with helping to end almost a month of heavy losses, which started in mid-June when the security regulator said it would tighten rules on credit-fuelled margin trading.

CSFC has played a key role in stemming the rout by channelling funds from the central bank into equities, while the 21 largest brokerages also pledged to invest 120 billion yuan in so-called “blue chip” exchange traded funds (ETFs).

But investors have remained wary, and news that a closely watched private survey on China’s manufacturing sector came in at its weakest level in more than a year sent many small investors rushing for the door on Monday.

“The market already showed weakness on Friday, so when I saw the weak trading this morning I sold 95 percent of my holdings,” Zhou Weiwei, who quit his job as an online merchant to trade stocks full-time, told AFP.

“I’ll wait for a while until I enter the market again.”

Confidence disappears

On Monday, the government said that profits of major industrial firms slipped 0.3 percent year-on-year in June to 588.57 billion yuan.

That followed news on Friday that a preliminary reading of Caixin’s Purchasing Managers’ Index (PMI) – an independent survey of manufacturing activity – came in at 48.2 for July, the weakest reading since 48.1 in April 2014.

The weak data further unsettled investors already nervous about the government’s ability to manage China’s financial system.

US and Canadian markets fell sharply on the back of China’s routing on Monday, with the Nasdaq falling by 1 percent and the Toronto Stock Exchange down by 1.3 percent.

Source: AFP, Reuters