Trouble is not over for the Chinese Stock Market. It started the New Year with a $590 billion selloff. State controlled funds were used to slow the fall of stock prices but the Shanghai market still resorted to a circuit breaker rule and closed trading. Bloomberg Business writes about the $590 billion selloff.
China moved to support its sinking stock market as state-controlled funds bought equities and the securities regulator signaled a selling ban on major investors will remain beyond this week’s expiration date, according to people familiar with the matter.
Government funds purchased local stocks on Tuesday after a 7 percent tumble in the CSI 300 Index on Monday triggered a market-wide trading halt, said the people, who asked not to be identified because the buying wasn’t publicly disclosed. The China Securities Regulatory Commission asked bourses verbally to tell listed companies that the six-month sales ban on major stockholders will remain valid beyond Jan. 8, the people said.
Chinese policy makers, who took unprecedented measures to prop up stocks during a summer crash, are stepping in once again to combat a rout that erased $590 billion of value in the worst-ever start to a year for the nation’s equity market. While the intervention may ease some selling pressure, it also undermines authorities’ pledge to give markets more sway in the world’s second-largest economy.
Up until last summer’s plunge in prices the Chinese market had grown to $10 Trillion or half the value of the NYSE. Since that time a third or more of its equity has evaporated despite tens of billions of dollars’ worth of government money being used to support stock prices. With such a tough start to the new year what do you do after a $590 billion selloff if you are the Chinese leaders?
Moving to a Consumer and Market Driven Economy
China has followed a proven path to its current level of success. Central control worked well initially for China, Russia, Japan, Taiwan, Singapore and South Korea. Japan, Taiwan, Singapore and South Korea then each moved to a consumer driven and market driven economy. Russia did not and its economy paid the price. China is at a crossroads. Its export driven economy is slowing down in response to a global slowdown. And developing nations across the world are hurting because raw material orders from China have fallen. This mutual dependency is the norm in today’s world. China has acknowledged that it needs to let the market determine the price of its currency and that it needs to develop a more consumer driven economy to counter the export driven model that is starting to fail. China needs for things to settle down so what do they do after a $590 billion selloff? Reuters writes about how China battles to shore up stocks.
China struggled to shore up shaky sentiment on Tuesday a day after its stock indexes and yuan currency tumbled, rattling markets worldwide, but analysts warned investors to buckle up for more wild price swings in the months ahead.
Stocks fell more than 2 percent in early trade, prompting fears that exchanges were set for a second day of panic selling after a 7 percent dive on Monday set off a new “circuit breaker” mechanism, suspending trade nation-wide for the first time.
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 CNY=CFXS 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 amid criticism that it had fueled Monday’s sell-off.
These short term measures serve to slow the fall of stock prices but go against the plan to move to a market driven economy. China will need to print several trillion dollars’ worth of its currency to simply by stocks from everyone who wants to get out of the market.