The stock market keeps falling, giving China’s government more than a little pause for thought.
The Shanghai Stock Exchange Composite Index broke through the 4,000 support level Thursday for the first time since April, tumbling 3.5% to 3,913. The index now sits 24% below its June 12 high. More than 1.5 trillion yuan of the A-share market’s total capitalization has been lost, said Caixin.
Or as Bloomberg in its latest alarmist dispatch reported: “A dizzying three-week plunge in Chinese equities has wiped out $2.36 trillion in market value — equivalent to about 10 times Greece’s gross domestic product last year.”
Greece? You need the multiple because it’s like putting Lithuania’s GDP on stilts next to China’s Great Wall. But to be fair — there’s plenty of reason to be concerned about Chinese stocks. All the nail biting centers on the fact that Thursday’s slide came despite significant moves by the authorities to stabilize the market.
The Shanghai and Shenzhen stock exchanges got their clearinghouse to agree to cut equity-trading fees by 30%, starting Aug. 1. This should reduce investors’ trading costs.
Meanwhile, the China Securities Regulatory Commission (CSRC) posted new rules for margin trading and short-selling on its website, including relaxing the requirements for collateral. At a press conference, the CSRC announced it would let “all brokerage firms issue and sell short-term corporate bonds and package their expected earnings from margin trading and short-selling into securities products that can be sold for cash,” according to Caixin.
“Considering the current market conditions and in light of the necessities of market and regulatory demands, the CSRC decided to publish the policy on July 1, effective upon release,” it says.
The market was spooked three weeks ago when regulators sought to tight the margin requirements to get some speculation out of the market.
“Margin debt on the Shanghai Stock Exchange fell to 1.33 trillion yuan ($214 billion) on Wednesday for an eighth day of losses, the longest stretch of declines since the city’s bourse began to compile the data in March 2010,” reported Bloomberg.
But as a stock market moves lower and investor losses increase, investors who bought on margin are forced to sell to pay back their loans. This leads to more selling, creating a vicious circle.
While we may be in for some rough waters in the near future, Asia Unhedged remains bullish on the Chinese economy and believes things will eventually right themselves.
State-backed investors are standing by to support the market should the government issue the command, just as they have done in the past, Hong Hao, chief strategist of BoCom International, wrote in a commentary published on Caixin’s Chinese website.
The policies recently enacted by the government were last seen during the 2008 global financial crisis, Hong wrote. Back then, a similar approach halted the market’s continued declines, prompting a series of short-lived rallies, until share prices finally recovered, he wrote.
The downside, of course, is this runs the risk of creating a moral hazard. Reckless investment could break out again after bad times have passed, Xu Gao, chief economist at Everbright Securities, wrote in a commentary published on Caixin’s Chinese website.
But Chinese official say they want to create a more market-driven economy with less government intervention. Asia Unhedged thinks wiser heads will focus on this long-term eventuality rather than short-term tempests in a market teacup.