In October, the Shanghai Composite Index fell by 24.63%, the largest monthly tumble in the past 14 years, while the Shenzhen Component Index saw its sharpest decrease since August 1991. Government policies to maintain capital market stability have failed to prevent the market from dropping below 1800 points, the so-called bottom line. Now the debate over whether the government should intervene in the market with stabilization fund is hotting up yet again.
Zhou Zhengqing, former chairman of the China Securities Regulatory Commission (CSRC), said on October 29 that the A-share market was now slumping irrationally. He suggested the government establish a stabilization fund to restore investor confidence, explaining that this was a tactic widely adopted by governments as an effective measure to intervene in the capital market.
The Chinese stock market began its slump in October last year. Trading permission for non-tradable shares, large scale corporate refinancing plans, and too tight monetary policy are seen to be the main cause for the decline. With the market having slumped 70% in 12 months, the central bank has cancelled the quota system for banks’ credit, but the tradability of non-tradable shares is still unsettled. What is more depressing to investors is the performance of listed companies in the economic slowdown. These firms reported their third quarter statistics by the end of October, and except for the banking industry, heavily weighted industries including petrochemicals, electric power, steel, aviation, and real estate all saw significant performance decline. Insurance companies such as PingAn were the biggest victims.
To support the market, the central bank cut the benchmark interest rate three times within a month, the State-owned Assets Supervision and Administration Commission has encouraged central enterprises to increase the share holding of their listed sectors, and the CSRC recently announced the launch of margin trading, but measures such as these have shown no ability to restore investor confidence. Since the basic situation isn’t going to turn upward any time soon, and the trade of non-tradable shares is looming, investors are expecting the government to come up with some real cash to “rescue” the market.
For Zhou Zhengqing, the government’s policy is not at all clear to investors, who therefore can’t see the government’s determination. Behind Zhou’s appeal for stabilization lies the idea that the rise and fall of the stock market is decided by fund supply and demand, which is widely accepted on the A-share market. Earlier, Central Huijin functioned as stabilization fund when it increased its holding of three large commercial banks. The social security fund also increased its share holdings on a small scale. These were interpreted as the government’s attempt, however tentative, to buck up the market.
Supporters of stabilization even believe it can relieve investors’ dilution fears over the onslaught of non-tradables. The big problem, though, is the scale of the fund. Central Huijin’s $200 billion had nary an effect. Some market analysts suppose that China’s huge forex reserve, which has seen no gain from European and US stock markets, can serve the Chinese market with lower P/E ratio.
But investors’ and experts’ appeals haven’t taken hold in the government as yet. Those against wonder which department or institute will operate the fund. China Investment Corporation, for one, has been much criticized for its overseas investment. Now any potential operator of the stabilization fund will face China’s stock market, which is tougher.
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Stabilization Fund Debated, But Who Would Run It?
4 November 2008
In October, the Shanghai Composite Index fell by 24.63%, the largest monthly tumble in the past 14 years, while the Shenzhen Component Index saw its sharpest decrease since August 1991. Government policies to maintain capital market stability have failed to prevent the market from dropping below 1800 points, the so-called bottom line. Now the debate over whether the government should intervene in the market with stabilization fund is hotting up yet again.
Zhou Zhengqing, former chairman of the China Securities Regulatory Commission (CSRC), said on October 29 that the A-share market was now slumping irrationally. He suggested the government establish a stabilization fund to restore investor confidence, explaining that this was a tactic widely adopted by governments as an effective measure to intervene in the capital market.
The Chinese stock market began its slump in October last year. Trading permission for non-tradable shares, large scale corporate refinancing plans, and too tight monetary policy are seen to be the main cause for the decline. With the market having slumped 70% in 12 months, the central bank has cancelled the quota system for banks’ credit, but the tradability of non-tradable shares is still unsettled. What is more depressing to investors is the performance of listed companies in the economic slowdown. These firms reported their third quarter statistics by the end of October, and except for the banking industry, heavily weighted industries including petrochemicals, electric power, steel, aviation, and real estate all saw significant performance decline. Insurance companies such as PingAn were the biggest victims.
To support the market, the central bank cut the benchmark interest rate three times within a month, the State-owned Assets Supervision and Administration Commission has encouraged central enterprises to increase the share holding of their listed sectors, and the CSRC recently announced the launch of margin trading, but measures such as these have shown no ability to restore investor confidence. Since the basic situation isn’t going to turn upward any time soon, and the trade of non-tradable shares is looming, investors are expecting the government to come up with some real cash to “rescue” the market.
For Zhou Zhengqing, the government’s policy is not at all clear to investors, who therefore can’t see the government’s determination. Behind Zhou’s appeal for stabilization lies the idea that the rise and fall of the stock market is decided by fund supply and demand, which is widely accepted on the A-share market. Earlier, Central Huijin functioned as stabilization fund when it increased its holding of three large commercial banks. The social security fund also increased its share holdings on a small scale. These were interpreted as the government’s attempt, however tentative, to buck up the market.
Supporters of stabilization even believe it can relieve investors’ dilution fears over the onslaught of non-tradables. The big problem, though, is the scale of the fund. Central Huijin’s $200 billion had nary an effect. Some market analysts suppose that China’s huge forex reserve, which has seen no gain from European and US stock markets, can serve the Chinese market with lower P/E ratio.
But investors’ and experts’ appeals haven’t taken hold in the government as yet. Those against wonder which department or institute will operate the fund. China Investment Corporation, for one, has been much criticized for its overseas investment. Now any potential operator of the stabilization fund will face China’s stock market, which is tougher.
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