China ramps up efforts to halt stock market rout

China’s central bank stepped up state support for sinking stocks on Wednesday, as investors rushed to sell what they still could after a fresh wave of share suspensions that has halted trading in half the market.

The Shanghai Composite closed down 5.9 per cent after falling as much as 8 per cent at the open. The Shenzhen index lost 2.5 per cent, while the start-up ChiNext board managed to inch up 0.5 per cent.

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The renewed selling followed another round of share suspensions overnight that have now halted trading in 1,476 stocks — or more than 50 per cent of all listed companies on China’s two main exchanges. The suspensions have frozen $2.6tn worth of equity, according to Bloomberg calculations.

The sell-off was equally pronounced in Hong Kong, where global investors typically trade Chinese stocks. The Hang Seng index suffered one of its biggest point drops on record, shedding 5.8 per cent to erase all its gains over the previous 12 months.

Hong Kong Exchanges & Clearing, the bourse operator, dropped 8.3 per cent, taking its loss over the past five days to almost 30 per cent and robbing it of its crown as the world’s most valuable exchanges operator. That now reverts to CME Group.

The Hang Seng China Enterprises index of large Chinese companies listed in Hong Kong tumbled 8.8 per cent, and is now down a tenth since the start of the year.

As the stock rout continued, Beijing responded with further measures to steady the market. The People’s Bank of China said it was helping state-owned China Securities Finance Corporation access liquidity to help the fund “hold the line against the outbreak of systemic or regional financial risk”.

This is the clearest statement yet about what CSF is doing — buying shares directly using PBoC money, a big departure from its traditional role of lending to brokerages to support margin lending.

Q & A

If corporate management, like diplomacy, can be said to be war by other means, China’s two most famous military strategists would probably approve of the moves by more than 1,400 Shanghai and Shenzhen-listed companies to suspend trading in their shares.

The CSF is also providing Rmb260bn ($41.8bn) of credit to brokerages in order to help them buy shares, according to the China Securities Regulatory Commission.

In a separate statement the CSRC added that the CSF would continue to buy blue-chips, but would also step up purchases of shares in smaller companies to “relieve the problem of strained liquidity”.

In its statement ahead of Wednesday’s open, the CSRC had noted: “There is a mood of panic in the market and a large increase in the irrational dumping of shares, causing a strain of liquidity.”

In a further effort to halt the rout, China’s state-sector administrator instructed government-owned companies not to sell shares, while the insurance regulator said it had cleared “qualified insurers” to increase their asset allocation to equities.

As stocks fell on Wednesday, large-caps broke their recent run of gains, with PetroChina — the country’s biggest company — dropping 8.6 per cent. ICBC, the world’s largest bank by assets, shed 4.7 per cent, while Ping An Insurance sank by the daily limit of 10 per cent.

Since hitting a seven-year high in mid-June Chinese stocks have been in free fall, with both major indices dropping more than a third to wipe $3tn off their value.

The government has already taken a number of steps to prevent further selling by Chinese retail investors — who dominate the market — such as suspending initial public offerings, and using state funds to buy shares directly. It has also cut trading fees in a bid to improve market liquidity.

In spite of the panic selling, a handful of global investment banks sounded a bullish note on the Chinese market.

HSBC upgraded its rating on China to “neutral” from “underweight” and raised its price target for the Shanghai Composite to 4,000 points (it is currently trading around 3,500), while Goldman Sachs said it expected the CSI 300 index to rise more than a quarter from its current level over the next year.