Chinese stock markets continue to nosedive as regulator warns of panic

Chinese stock markets tumbled again on Wednesday as a range of government measures aimed at preventing a further nose dive in share prices had no impact.
The Shanghai Composite Index closed down 5.9%, while the Shenzhen Component Index fell to close down almost 3%.

Within 10 minutes of trading on Wednesday morning, a wave of listed companies across China’s two stock markets had dropped by the daily limited of 10% and had their shares automatically suspended. About 1,400 companies, or more than half of those listed in Shanghai and Shenzhen – filed for a trading halt in an attempt to prevent further losses. This suspension is likely to last “until the market is stabilised and liquidity is returned to the market”, said Chen Jiahe, chief strategic analyst with Cinda Securities.

China’s securities regulator said there was “panic” in the stock market with irrational selling off increasing and “leading the stock market to a situation of intense liquidity”.

As part of the latest efforts to prevent further losses, China’s state owned enterprises were ordered by the state asset regulator not to sell shares of their listed companies. The Assets Supervision and Administration Commission also encouraged them to purchase more shares in an effort to stabilise prices.

The People’s Bank of China said it was assisting China’s Securities Finance Corporation (CSFC), the national margin trading service provider - which helps brokers lend money to institutions in order to buy shares - to help steady the stock market.

It said it would do this through measures such as aiding inter-bank lending. It said it would keep a close watch on the market and continue to support the CSFC and guard against systematic and financial risks.

A spokesperson for China Securities Finance Corporation also said it would purchase more shares of small-and-medium-size listed companies. It is these companies that have suffered the biggest losses.

Meanwhile, led by losses in China, theHong Kong Hang Seng Index closed almost 6% down on Wednesday.

Chen said he is not sure whether the market will continue to fall at the same rate over the coming days. “The market is panicking and the government is trying to save it so we are having something like a conflict between the two powers and we are not sure which will be the strongest.”

Christopher Balding, a professor of economics at Peking University said that while it was not possible to know exactly why so many companies had suspended trading, a large number were doing so because they had used their own stock as collateral for loans and they want to “lock in the value for the collateral”.

Ayako Sera, a senior market economist at Sumitomo Mitsui Trust Bank in Tokyo, said: “Today is all about China, with Greece in the background now that it’s been given a new deadline. Shanghai’s early losses were like a cliff-dive, which had a huge impact on investor sentiment.”

Previous measures taken over the weekend by the Chinese government in an attempt to stabilise the markets appeared to have been unsuccessful. Analysts said the falls looked set to continue. Balding said: “I don’t see it getting better. There is not going to be a turn around within the next week or two.”
“It probably has a long way to go. Margin loans basically rose much faster and they are not falling nearly as fast, margin debt is not falling nearly as fast as the market is falling. What that is telling us is that there is a lot of stock that needs to be sold that hasn’t been sold yet.”

China’s stock markets had previously been among the top-performing in the world, and had hit a seven-year peak in the middle of June. The Shanghai stock market had surged more than 150% in 12 months, but it has fallen 30% over the past three weeks – including a plunge of 12% last week.

Unlike most other stock markets, where investors are mostly institutional investors, in China, 80% of investors are small retail investors. This is a concern for the Chinese government because it causes a “political risk”, according to Balding. The losses on the stock markets are going to cause a lot of people to lose money, leading the government to “worry about people protesting on the streets”, he said.