Crisis in China

THE ECONOMIST: China is certainly not the first country to try to prop up a falling stockmarket. The central banks of America, Europe and Japan have all shown form in buying shares after crashes and cutting interest rates to cheer up bloodied investors. But the circumstances and the manner of China’s intervention of the past ten days make it an outlier, worryingly so.

The trigger in China’s case is perplexing. Yes, the stockmarket is down a third over the past month, but that has simply taken it back to March levels; it is still up 80% over the last year. Growth, though slowing, has stabilised recently. Other asset markets are performing well. Property, long in the doldrums, is turning up. Money-market rates are low and steady, suggesting calm in the banking sector. The anticipated correction of over-valued stocks hardly seems cause for much anguish.

Yet China’s intervention has screamed of panic. Had the central bank stopped at cutting interest rates—justifiable support for the economy when inflation is so low—that would have been reasonable. Instead, there has been a spectacle of ever-more drastic actions to save the market. Regulators capped short selling. Pension funds pledged to buy more stocks. The government suspended initial public offerings, limiting the supply of shares to drive up the prices of those already listed. Brokers created a fund to buy shares, backed by central-bank cash. All the while, state media played cheerleader. Far from saving the market from drowning, the succession of life buoys only pushed it further under water. The CSI 300, an index of China’s biggest-listed companies, fell almost 10% over seven trading days after the rate cut. ChiNext, an index of high-growth companies that is often described as China’s Nasdaq, fell by 25%.

Theories have flourished about why the government has waded in so heavily. The apparent desperation is, some believe, a sign that officials see a looming economic collapse, and are trying to staunch the wound before social upheaval ensues. That story is intriguing, but it is not the most likely.

Lost in all the drama about the stockmarket is that it still plays a surprisingly small role in China. The free-float value of Chinese markets—the amount available for trading—is just about a third of GDP, compared with more than 100% in developed economies. Less than 15% of household financial assets are invested in the stockmarket: which is why soaring shares did little to boost consumption and crashing prices will do little to hurt it. Many stocks were bought on debt, and the unwinding of these loans helps explain why the government has been unable to stop the rout. But this financing is not a systemic risk; it is just about 1.5% of total assets in the banking system. Read the full article

BLOOMBERG: China’s securities regulator banned major shareholders, corporate executives and directors from selling stakes in listed companies for six months, its latest effort to stop the nation’s $3.5 trillion stock-market rout.

Investors with stakes exceeding 5 percent must maintain their positions, the China Securities Regulatory Commission said in a statement. The rule is intended to guard capital-market stability amid an “unreasonable plunge” in share prices, the CSRC said.

While China has already ordered government-owned institutions to maintain or boost their stock holdings, the CSRC’s directive expands the ban on sales to non-state companies and potentially foreign investors who own major stakes in mainland businesses. Regulators have unveiled market-boosting measures almost every night over the past 10 days, steps that have so far failed to revive investor confidence. Foreign traders sold Chinese shares at a record pace this week in part due concerns over the government’s meddling in markets.

“It suggests desperation,” Mark Mobius, chairman of Templeton Emerging Markets Group, said by phone Wednesday. “It actually creates more fear because it shows that they’ve lost the control.” Read the full article

WSJ: Stocks in Hong Kong tumbled, while China’s stabilized, as Beijing takes unprecedented steps to stem a three-week selloff and Greece voted to reject its bailout terms.

Hong Kong’s Hang Seng Index shed 3.2% Monday, its worst one-day performance since 2012. The index is now down 11.3% since its April high, entering correction territory, defined as a drop of more than 10%. A gauge of Hong Kong-listed Chinese companies, known as H-shares, is down 3%. To date, Hong Kong had largely avoided the roller-coaster trading that wiped out about $2.4 trillion in value from Chinese shares during a three-week decline.

“The sentiment is really bad amid concerns over not only the problem in Greece but also the problems in the mainland China stock market,” said Dickie Wong, executive director of research at Hong Kong-based brokerage Kingston Securities.

Potential for volatility sparked by Greece’s vote and recent slides in mainland-listed shares put Hong Kong’s securities regulator on standby earlier Monday. “Given the ‘No’ vote in the Greek referendum and the latest developments in the mainland A-shares market, there may be increased volatility in the Hong Kong markets,” said Hong Kong Monetary Authority in a statement. “The banking system in Hong Kong is highly liquid and is well equipped to handle any such volatility. The HKMA stands ready to provide liquidity support to the banking system should it become necessary to do so.” Read the full article

WSJ: On a hot Sunday in mid-June, around 600 eager stock investors packed the largest ballroom at the Grand Hyatt in Lujiazui, Shanghai’s equivalent of Wall Street.

With Chinese stocks at a seven-year high, the investors had gathered to listen to a talk by one of China’s top fund managers, Wang Weidong, of Adding Investment. The crowd was so large, the air conditioning couldn’t keep up and hotel staffers brought in chairs and bottled water for the participants.

The Shanghai Composite Index had just hit a seven-plus-year high of 5178.19 that Friday—it closed at 5166.35 that day—and was up 162% from its low in 2014. Read the full article

TECHINASIA: Unless you’ve been living under a rock recently, you’re probably aware that all is not well in China’s stock markets. After hitting an all-time high in mid June, China’s markets have dropped by nearly a quarter, shedding in excess of US$3 trillion (yeah, that’s trillion with a T) in value.

China has been quick to respond to the drop, halting IPOs, cutting interest rates, lowering reserve requirements, and pumping billions of stimulus dollars into the markets to bring prices back up. That has bumped markets up a bit, although whether these measures are a cure or just a stopgap remains to be seen. But how is all of this affecting the tech industry?

For tech companies listed in China, the signs aren’t great. The government’s measures have helped prop up stock prices, but this is disproportionately affecting state-owned enterprises. Private tech firms are much worse off. If you need evidence of that, look not at the Shanghai Composite Index but rather at the ChiNext Index, a NASDAQ-style board of the Shenzhen Stock Exchange that features mostly high-tech and internet firms. Despite the government’s recovery measures, it has continued to drop. Read the full article