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Shanghai stocks close up after government steps in

China's benchmark stock index closed up 2.41 percent on Monday in a day of rollercoaster trading after authorities unveiled an unprecedented package of measures designed to shore up a plunging market.

Despite the gain for the day, analysts question whether levels are sustainable following a huge run-up in Chinese shares over the past year.

Until last month mainland Chinese markets were among the world's best recent performers, with Shanghai rising more than 150 percent in a spectacular borrowing-fuelled bull run in the 12 months to its top on June 12.

But the market had plunged almost 30 percent over the three weeks to Friday, prompting the government to intervene over the weekend on concerns the slump could threaten the broader economy.

On Sunday, the government said the central bank would provide funds through the state-backed China Securities Finance Co. to "protect the stability of the securities market", according to exchange watchdog the China Securities Regulatory Commission (CSRC). It gave no amount but state media said the funds would be used to "revive" the bourse.

The CSRC also said on Sunday that there would be no initial public offerings (IPOs) "in the near future", according to a separate statement. State media said 28 companies whose flotations have already been approved would postpone them.

Chinese regulations mean new share issues offer near-guaranteed profits and so drain funds from the rest of the market, hurting prices and sentiment.

"This type of state-led market-saving has never been seen before, even when the market crashed during the last financial crisis," Zheshang Securities analyst Zhang Yanbing told AFP, referring to the global economic meltdown of 2008.

On Saturday, China's 21 largest brokerage firms also announced they would invest at least 120 billion yuan ($19.3 billion) in so-called "blue chip" exchange traded funds (ETFs).

"The market is quite sceptical about those measures," Paul Chan, Hong Kong-based chief investment officer for Asia ex-Japan at Invesco, told Bloomberg News.

"It is very difficult to stabilise a leveraged market, dominated by retail investors. I don't know how this will pan out but in near term, it's just going to expand more volatility," he said.

- 'Short-term fix' -

Much of the gains of the past year were built on margin trading, by which investors only need to deposit a small proportion of the value of their trades, potentially generating bigger profits but also exposing them to bigger losses.

The Shanghai Composite Index jumped 88.99 points to 3,775.91 on turnover of 943.4 billion yuan ($154.2 billion) on Monday. It surged 7.82 percent at the open but fell as much as 0.92 percent during the day.

The Shenzhen Composite Index, which tracks stocks on China's second exchange, lost 2.70 percent, or 56.63 points, to 2,041.85 on turnover of 609.1 billion yuan. It fell as much as 5.53 percent, wiping out an earlier gain of 6.55 percent.

The Chinese market -- which is partially insulated from the global financial system -- was not focused on Greece, which sent most Asian markets down on Monday after Greek voters rejected more austerity demands from creditors.

China's latest measures came after other actions last week -- including an interest rate cut, relaxed rules on margin trading, and proposals to let the state social security funds invest in equities -- failed to arrest steep declines.

"The market may show a knee-jerk reaction to the measures but I am not sure how sustainable it will be," Ronald Wan, Hong Kong-based chief executive officer of Partners Capital International, told Bloomberg News.

Analysts say China needs to move towards a more market-oriented economy, instead of the more heavy-handed government measures exemplified by the stock market bailout.

"The measures are of course non-market ones. At this point, the damage is too severe and the market has lost it ability to self-adjust, which calls for all available state resources to try and revive it," Chen Xingyu, an analyst for Hong Kong's Phillip Securities, told AFP.

Leaders declared in 2013 that the market would play a more "decisive" role in the world's second largest economy. Proposed reforms include reforming the IPO system to allow the market to determine which companies offer shares, rather than the CSRC.

"These (stock market) measures are meant for short-term fix, but can't address the fundamental problems facing China's equity and financial system," ANZ Banking Group said in a research note.




 

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