Beijing-Style Greenspan Put Losing Hold on Stock Market

China stock strategists are losing faith in the Beijing Put.

Speculation that policy makers will act to keep a floor under share prices, providing similar protection against losses as the derivatives contracts that give the right to sell a security, has fueled at least five rallies in the Shanghai Composite Index since June. The latest was a 0.8 percent increase yesterday that came as traders speculated state-linked funds were purchasing equities to keep the gauge above 2,000.

While that level has proven a good entry point for investors, the size and duration of gains has gotten smaller each time since an 11-week rally that lifted the Shanghai gauge by 16 percent from its June low. Firms from Bocom International Holdings Co. to DBS Group Holdings Ltd. say the index is poised to sink as a weak property market weighs on the economy and the government’s focus on controlling credit growth deters it from unveiling a major stimulus package.

“I do not believe in the ‘Beijing Put’,” Lim Say Boon, the Singapore-based chief investment officer at the private banking unit of DBS Group, Southeast Asia’s largest lender by market value, wrote in an e-mail yesterday. “Chinese policy makers face a dilemma. If they stimulate the economy, particularly through monetary and credit easing, they risk reigniting the credit explosion of 2009-2012.”

Greenspan Put

Phone calls to China Investment Corp., the sovereign fund that holds the government’s stakes in banks and brokerages, and unit Central Huijin Investment Ltd. seeking comment on stock-market moves weren’t answered yesterday.

The Shanghai Composite dropped 0.2 percent at the close today, erasing a 0.8 percent increase that was spurred by better-than-estimated manufacturing figures and speculation that the government is taking more measures to support growth. The early advance was a “knee-jerk” reaction and any equity gains will be short-lived amid risks in the property market, said Xu Shengjun, an analyst at Jianghai Securities in Shanghai.

The expectation that Chinese policy makers will prevent asset prices from falling too far has parallels with the U.S., where traders for years came to rely on the so-called Greenspan Put. The phrase took its name from former Federal Reserve Chairman Alan Greenspan, whose practice of lowering interest rates to prop up financial markets helped spark rallies in U.S. equities in the late 1990s and early 2000s.

Intervention History

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.

As shares tumbled to four-year lows in June 2013, the government raised its stakes in China’s four biggest lenders and said it would keep buying for six months. The central bank also gave assurances a surge in interbank borrowing costs, which had fueled losses in stocks, would be temporary.

When the Shanghai gauge fell back below the 2,000 level in January, the central bank again took measures to boost liquidity by pumping money into the financial system and expanding a loan facility to meet holiday demand for cash. The stock index climbed as much as 7.6 percent before erasing gains over the next month.

Relative Value

A subsequent rally of 7.1 percent, spurred by regulatory efforts to ease funding restrictions for banks and property developers, was all but wiped out after three weeks. The next rebound lifted the index by as much as 2.5 percent as China’s State Council said it will deepen reforms of the nation’s capital markets, including relaxed limits on foreign investment in shares.

The 2,000 level “should break,” Hao Hong, the Hong Kong-based China equity strategist at Bocom International, wrote in an e-mailed response to questions. Weakness in the nation’s property market or a pickup in currency volatility could lead to further declines in the Shanghai gauge, he said.

The Shanghai index probably won’t fall much further than 2,000 because the government “can’t tolerate” losses below that level, said Cai Feng, a strategist at Guoyuan Securities Co. The Shanghai Composite is valued at 1.3 times net assets and traded this month at a record discount to the MSCI All-Country World Index, which has a multiple of about 2, according to data compiled by Bloomberg.

Trading Slumps

“The bottom is near,” Cai said by phone from Shanghai yesterday. “The government will use tactics including policies, public opinion and funds. In terms of injection of funds, it will increase holdings of big state-owned companies and buy index exchange-traded funds.”

Investor enthusiasm for stocks is waning as the economy slows. The three-week average of new stock account openings fell to the lowest level since at least 2007 in the period ended May 16. The value of shares traded on the Shanghai exchange fell to 48.34 billion yuan ($7.8 billion) yesterday, the lowest level since January and the second-lowest level since December 2012, according to data compiled by Bloomberg.

New-home prices rose in April in the fewest cities in a year and a half, while residential sales fell 18 percent from March, according to the statistics bureau. The yuan lost 2.6 percent in the first quarter, the biggest slide since a dollar peg was scrapped in July 2005, on speculation the People’s Bank of China is looking to deter one-way appreciation bets.

“If the economy continues to trend down, the likelihood of the index breaching 2,000 is high,” Arthur Kwong, head of Asia Pacific equities at BNP Paribas Investment Partners, said by e-mail from Hong Kong. “Valuation is fair, not cheap enough to support the slowdown.”

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