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Beijing Slows Its Market Sell-Off, But Can’t Stop It

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Investors look at screens showing stock market movements at a securities company in Beijing in January 2016.FRED DUFOUR AFP/Getty Images

China moved to shore up shaky sentiment on Tuesday a day after its stock indexes and currency tumbled, rattling markets worldwide, but analysts warned investors to buckle up for more wild price swings.

The central bank and the Chinese stock market regulator both intervened during the day to stop selling that basically continued Monday’s bloodbath, but stocks still ended the day down, albeit by a much smaller amount than yesterday.

The People’s Bank of China (PBOC) poured nearly $20 billion into money markets, its largest cash injection since September, and traders suspected it was using state banks to prop up the yuan at the same time.

The China Securities Regulatory Commission (CSRC), for its part, announced it was planning new rules to further restrict share sales by major stakeholders in listed companies, and said it would further tweak the ‘circuit-breaker’ mechanism that stopped trading on Monday.

How long any reprieve will last is still in question.

In a dilemma similar to the U.S. Federal Reserve’s recent tapering of its stimulus program, Beijing is trying to orderly unwind a massive and unprecedented stock market rescue last summer, while pressing ahead with reforms to allow markets to have a greater say in determining the yuan’s value.

Its heavy-handed approach to the stock market crash and its surprise devaluation of the yuan in August had called its policymaking into question and sparked global market volatility.

Keeping China’s notoriously volatile and speculative stock markets stable will be a stiff challenge. Some market watchers say the government’s interventions have kept stock valuations excessively high given the cooling economy and falling profits.

Government actions have also suppressed trading volume, leaving the market more susceptible to big price swings, and discouraged foreign investors who tend to hold stocks longer than hit-and-run local retail investors.

“We’ve been waiting for a market drop like this for a long time,” said Samuel Chien, a partner of Shanghai-based hedge fund manager BoomTrend Investment Management Co.

“The economy is poor, stock valuation is still high, and the yuan keeps sliding, showing capital outflows are accelerating. The market drop is overdue.”

Indeed, retail investors who spoke to Reuters said they were steering clear of stocks, having already been burned by this week’s experience.

One 23-year-old from Guangzhou who gave his surname as Hu said he had bought stocks on Monday afternoon, assuming that the circuit breaker would never be triggered, only to see it kick in well before the market close, locking in a 5% loss.

He took advantage of a mild bounce on Tuesday to exit his position, saying he had “learned a lesson in blood.”

China is also wrestling with market expectations that it will allow further depreciation of the yuan to shore up weak exports, a scenario many traders believe is inevitable as the economy slows and more investors pull capital out of the country in search of better returns elsewhere.

Authorities let the yuan weaken 4.7% against the dollar last year, a record yearly loss. It slipped further to fresh 4-1/2 year lows on Monday, which some blamed for aggravating Monday’s stock market slump.

If Tuesday’s policy-induced market respite proves temporary, regulators might have to freeze new share offerings again, extend a ban on certain share sales and keep the “national team” of brokerages and asset managers on the hook to keep buying and holding stocks at a loss.

But there were signs Tuesday that some executives would prefer to sit tight, rather than liquidate and risk being caught up in the investigations of market manipulation that have led to numerous high-profile finance industry executives being questioned or arrested in recent weeks.

 

At least 10 Chinese companies said their controlling shareholders or senior executives would not sell shares on the secondary market within the next six or 12 months. The six-month ban on share sales by listed companies’ major shareholders, imposed during the height of a market rout last year, will expire on Jan. 8, unlocking an estimated 1.24 trillion yuan ($190.23 billion) worth of shares. None of the companies are household names outside China.