China Market Moves Spurred by Concerns Over Broader Damage

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China Stocks See Best Two-Day Gain in Seven Years

As China’s stock market plunged in recent weeks, Communist Party leaders moved quickly to intervene. What were they so afraid of?

Government moves included a halt in initial-public offerings, setting up a stock-buying fund of $19.3 billion and a ban on state-owned companies selling shares of listed units. Even the Public Security Ministry got involved: it’s now probing cases of what it called “malicious” short selling.

At first, the moves appeared to have little effect, and stocks continued to slide. The past two trading days have told a different story as the Shanghai composite jumped 5.8 percent Thursday and then closed 4.5 percent higher Friday. Hong Kong’s benchmark Hang Seng Index rose 2.1 percent.

Here are five reasons Chinese leaders may have decided they had no choice but to take action.

1. Raising capital: Companies saw an opportunity to raise money on the market as stocks rose. The subsequent rout threatens at least $154 billion in share sales that would have helped them finance new investment and ease a mounting debt load.

2. Political stability: As the market doubled from 2,500 in December, state media added to the fervor. “At the 4,000 level, the Shanghai index is just at the start of the bull market,” the People’s Daily said April 21. Such pronouncements may leave China’s 90 million individual investors feeling betrayed and questioning the Communist Party’s ability to steer the economy. “Social stability must be maintained,” said Hao Hong, Bocom International Holdings Co.’s Hong Kong-based chief strategist.

3. Protecting the broader economy: Plunging shares prices may prompt Chinese consumers to rein in spending. Nissan Motor Co., the biggest Japanese carmaker in China by sales, said this week the stock-market turmoil is slowing demand for luxury and premium cars. Everbright Securities Co. Chief Economist Xu Gao estimates an equity slump could cut 0.6 percentage point from GDP growth if followed by a pullback of financial activity.

4. Currency stability: A massive stock market correction could lead to bigger capital outflows and make the yuan more volatile. That could undermine the government’s effort to spread the use of the yuan worldwide and have it included in the International Monetary Fund’s special-drawing rights currency basket. The IMF is set to review the yuan’s inclusion in October.

5. The prestige factor: Since coming to power in 2012, President Xi Jinping has sought a greater global role for China, pressing ahead with an infrastructure bank that rivals existing institutions and pressing China’s claims in the South China Sea. Xi has also taken responsibility for the economy by appointing himself to lead two key policy committees. A collapsing stock market could undercut Xi’s argument that China deserves more say in global affairs.

(An earlier version of this story corrected the quote in the sixth paragraph to read “stability.”)

— With assistance by Haixing Jin

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