Wednesday 26 November 2008
Rumour Resurfaces That China Will Set Up Market Stabilisation Fund
Rumours have resurfaced again that the Chinese government will inject up to Rmb400b through a market stabilisation fund to shore up the stock markets. The speculation came as a mainland newspaper report, The Economic Observer, said the National Development and Reform Commission (NDRC) will submit the proposal to the Central Economic Work Conference due to be held in early December.
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Rumour Resurfaces That China Will Set Up Market Stabilisation Fund
Rumours have resurfaced again that the Chinese government will inject up to Rmb400b through a market stabilisation fund to shore up the stock markets. The speculation came as a mainland newspaper report, The Economic Observer, said the National Development and Reform Commission (NDRC) will submit the proposal to the Central Economic Work Conference due to be held in early December.
(The economic work conference is called every December to discuss the central government’s economic targets for the new year with the key regulators and local government officials. Often, the focus will be on the economic targets for first 6 months of the new year. In the forthcoming meeting, the agenda is likely to focus on working out the logistics and concrete measures for implementing Beijing’s and the local government’s fiscal stimulus to ensure at least a 8% growth next year. It will likely also touch on additional back-up measures. )
The speculation that NDRC will propose the market intervention is somewhat strange, as it is the country’s industrial regulator which normally does not extend its tentacles to the stock markets. It is true that the NDRC is the most powerful of the Chinese government ministries, so it has often been touted as a mini-Cabinet. For the NDRC to make such a proposal could mean that it believes any further downside risk to the stock markets will hurt consumption, which account for 40% of 2008’s GDP growth of 11.9%. Beijing is trying hard to rev up consumption to take up the expected slack in net exports as a contributor to GDP growth, although its stimulus packages have so far been more focused on FAI.
The proposed amount of Rmb400 comes to about 10% of the market cap of the Shanghai and Shenzhen stock markets. But there is a wide divide among Chinese academics on whether such market intervention is necessary and effective.
We believe that the Chinese government will stop at nothing to ensure at least an 8% GDP growth next year, so we do not discount the possibility of such a move to prevent a sharp slide in the stock market to stop further destruction of the wealth effect.
However, if this does come about, it will likely be a contingency measure in the event that the Shanghai Composite Index sinks substantially below 1,500 points.
Cheers
Foo Choy Peng
Associate Director (China Research)
UOB Kay Hian (HK)
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