China’s financial industry joined the nation’s securities regulator in moving to shore up the nation’s $7.7 trillion stock market, spurring the biggest rally in more than six years.
Money managers should avoid panic selling because a “structural rally is brewing,” the Asset Management Association of China said in a letter to its members Tuesday. Guotai Junan Securities Co., the country’s second-largest brokerage, said it would ease restrictions on margin trading. Investors should have “confidence” and ignore “irresponsible rumors,” China Securities Regulatory Commission spokesman Zhang Xiaojun said late Monday, while the Ministry of Finance said it may allow the nation’s pension fund to invest in equities.
The announcements came after a weekend interest-rate cut by the central bank failed to prevent the Shanghai Composite Index from entering a bear market on Monday. While Bank of America Corp. says state-led support for stocks will fail to spark a sustained rebound as margin traders unwind a record amount of leveraged bets, Macquarie Group Ltd. says authorities have “drawn a line in the sand” and will act to prevent the Shanghai Composite from falling below the 4,000 level.
“Those rate cuts over the weekend would have normally been a very powerful way to boost the market and because they failed, they now have to really introduce some confidence back into their efforts,” Erwin Sanft, the head of China strategy at Macquarie, said on Bloomberg Television. “We should continue to see them really defending the 4,000 point level.”
The benchmark stock gauge fell as much as 5.1 percent on Tuesday before jumping 5.5 percent to 4,277.22 at the close, the biggest intraday point swing since 1992.
Other measures the government can take to fight the steepest stock-market rout since 1996 include halting initial public offerings, reducing stamp duties or cutting lending rates, according to Bank of America strategist David Cui. A “vicious cycle” of margin calls could limit their impact, he said in an e-mail on Monday.
Margin debt on the Shanghai Stock Exchange fell for a sixth day on Monday to 1.36 trillion yuan ($219 billion), the longest stretch of declines since June 2014, while the benchmark gauge’s 10-day volatility reading jumped to the highest since 2008. A five-fold surge in leveraged wagers had helped propel the Shanghai index to a more than 150 percent gain in the 12 months through June 12.
Continued declines in the Shanghai Composite, which tumbled more than 20 percent in two weeks through Monday, risk sparking social unrest, BMI Research said in a statement Tuesday. Individual investors account for about 80 percent of trading on mainland Chinese exchanges.
Regulators are considering suspending IPOs in an attempt to stabilize the market, people familiar with the matter said Monday, asking not to be identified as the regulator’s deliberations are private. China Securities Regulatory Commission officials didn’t respond to a faxed request for comment.
China’s basic endowment pension fund will be allowed to invest in stock markets, according to draft regulations posted on the Ministry of Finance’s website late Monday. Guotai Junan announced measures Tuesday that increased the amount investors can borrrow and made it less likely they will face margin calls.
“As more people get burnt, the government feels more pressure,” said Ronald Wan, the chief executive officer of Partners Capital International in Hong Kong. “A disorderly decline will affect stability in the Chinese economy. To me, the 4,000 level seems to be a critical point for policy makers.”
Signs of government support at key levels in China’s stock market stretch back to at least June 2005, when the Shanghai Composite briefly fell below the 1,000 level. The regulator responded by urging funds to stabilize the market and allowing companies to buy back their own shares, which sparked a 12 percent rally over four days. In May last year, there were signs policy makers were acting to prevent the gauge from dropping below the 2,000 level.
For China’s fund managers, the message they received on Tuesday was clear.
“We must look after others while pursuing our own interest,” said the asset management industry group, which represents public funds, private equity firms, insurers’ asset management units and custodian banks. The statement ended with former Premier Wen Jiabao’s words during the 2008 global financial crisis: “Confidence is more important than gold.”