China's Stock Markets Rebound On Stimulus Measures But Analysts Question Massive Government Intervention

SHANGHAI -- China’s stock markets rebounded Thursday, as the government rolled out a raft of further emergency measures aimed at halting the dramatic slide, which has wiped more than 30 percent of share values since mid-June.

The main Shanghai Composite Index (SCI) closed almost 5.8 percent higher, almost completely regaining its loss from the previous day. China’s secondary board and high-tech board in Shenzhen both rose by more than 3 percent. Hong Kong’s Hang Seng Index also rebounded sharply, after its biggest fall in seven years on Wednesday, rising over 800 points, or about 3.5 percent, by mid-afternoon.

However many companies remained suspended from trading, in an attempt to avoid further falls. And some analysts questioned whether the official focus on propping up the market -- which had risen 150 percent over the past year, before its recent fall -- was the right strategy.

In a wave of moves on Wednesday night and early Thursday, regulators first banned shareholders holding more than 5 percent of any listed company from selling their stocks in the next six months. They also ordered China’s big state enterprises and centrally-owned financial companies not to sell shares “until the market stabilized.” And they sought to reassure investors, many of whom have borrowed money to buy shares, by announcing that lenders could delay the repayment deadlines for such "margin borrowers." Insurance companies were also told they could renegotiate deadlines for loans they had made to China’s brokerages, and were not allowed to demand early repayment.

The China Securities Regulatory Commission (CSRC) also appealed to senior executives of listed companies to buy more shares in their own companies and officials pledged policy assistance to help them do this. Several large companies -- including oil giant Sinopec and brokerage Haitong Securities -- said they would buy back shares to prop up their companies. The South China Morning Post reported that 20 percent of listed companies had now gained additional investment from management.

The government on Wednesday had already promised more money for mutual funds to ensure their “stable operation” and to help stabilize the capital market. And state media again downplayed the sense of crisis, headlining Premier Li Keqiang’s pledges of confidence in the economy’s future.

The official Global Times newspaper said in a commentary that the stock market crisis “does not reflect the fundamentals of the Chinese economy.” It said China had “an unparalleled ability to mobilize resources to accomplish large undertakings,” and it rejected criticism of the government’s efforts to shore up the market, saying, “All we need is confidence to overcome the hurdle, and only a cheerleading government can give us that.”

At the same time, the Global Times acknowledged that “this is probably the first time in China's stock market history that the government is engaged in such a large-scale rescue of its stock market,” and that “panic is still prevalent among the majority of investors.”

Also on Thursday, China’s deputy police minister visited the securities regulator, as part of what state media described as an investigation into “hostile short selling.” The move appeared to be a response to rumors that circulated in China last week that foreign banks and traders had encouraged the sell-off by shorting Chinese stocks -- and some observers said it may have been intended to reassure investors that the sell-off of shares was not inevitable. However some analysts have pointed out that some of the targets of criticism were foreign banks that had simply said the Chinese market was overvalued before its recent fall -- and state media admitted last week that foreigners had a very limited impact on the Chinese market.

The Global Times also quoted analysts who praised the suspension of trading by more than half of China’s listed companies as being “good for both investors and companies,” and said this would help bring stability to the market, by preventing investors from panicking and selling off shares in companies whose values had already fallen.

However critics have said the suspension of trading by so many companies risks encouraging further sell-offs, as investors unable to access funds they have invested in these firms have to sell stocks in other companies to pay back loans.

And a report on Shanghai’s Dragon TV on Thursday quoted local real estate agents as saying the turmoil on the markets had led to the cancellations of some property sales -- which had begun to rebound sharply before the market began to slump in June.

Signs of public dissatisfaction have also surfaced, aimed particularly at the government’s insistence earlier in the year that a boom on the stock market -- which had languished for many years -- would be good for the economy. Some Internet users criticized the official People’s Daily newspaper for publishing articles predicting a long-term bull market -- these were seen to have encouraged many ordinary citizens to start investing at the height of the market. And Reuters reported that some users had called on the head of China’s regulator to step down though most such comments were deleted from social media sites.

ING bank said the government might need to invest a far bigger amount than it has so far pledged -- as much as $650 billion -- to prevent the markets falling back to their level of last year, before the boom. Tim Condon, ING's chief economist for Asia, told the South China Morning Post that this amount was roughly equivalent to the outstanding margin debt invested in the Chinese market.

But other analysts -- both foreign and Chinese -- have questioned whether the government is fighting the right battle in its attempt to prop up the market, with some saying this will hinder attempts to make China’s financial system a more market-based one.

“We are concerned that asking big financial institutions to catch the falling knife is not helping lower systematic risk,” Societe Generale’s Asia economists said on Thursday, according to the SCMP. “We think that the policy focus should be on the real economy and the general liquidity level in the overall financial system.