China stocks continue lower despite intervention

Chinese stocks fell again on Tuesday, extending a recent run of losses in spite of measures to support the market.

Policy makers had attempted to stem the worst monthly run of losses in 20 years by helping brokerages and fund managers to buy large quantities of shares to prevent a collapse.

A quarter of A-share listed companies on the Shanghai and Shenzhen exchanges have suspended trading in the last week, freezing around $1.4 trillion of equity, according to Bloomberg figures.

Shares in the country have lost more than 30 per cent since mid June, wiping $3 trillion off the market amid the worst decline since 1992.

The Shanghai Composite was down 1.3 per cent on Tuesday, while the Shenzhen Composite lost more than five per cent.

Nevertheless, the latter remains up almost 37 per cent for the year, having at one stage risen by 122 per cent.

To stem the losses, China's state-backed margin finance company, courtesy of liquidity from the central bank, is helping brokerages and fund managers to buy vast quantities of stocks.

In addition, the China Association for Public Companies urged listed firms and their major shareholders and senior executives "to buy back, increase their shares and other measures to stabilise the companies' share price". Xinhua news agency has meanwhile reported that 28 companies have put their public offerings on hold.

Real economy

Craig Botham, emerging markets economist at Schroders, believes the equity bubble and subsequent sell-off is disconnected from economic fundamentals and the real economy.

He notes there have been large one-day falls when the regulator has moved to reduce volatility, hinting at the “fragility of the bubble”.

“Unfortunately for investors in Chinese equities, one such action by the regulator - restricting margin financing, which has set global historic records by reaching 3.4 per cent of GDP - prompted an ongoing sell-off,” says Botham.

The question is whether any major fall in share prices will impact the real economy.

On the one hand, there is an argument that it would “undermine faith in the assumed omnipotence of the government in handling the economy”. However, Schroders’ belief is that the real economy is still “sufficiently disconnected from the equity market that the impact on growth should be limited to the effects felt from the financial firms involved and those wealthier households able to participate in the rally, and subsequent bust”.

Nevertheless, the effects will ripple across China and beyond. “The slumping stock market presents a real risk to the attempts to rebalance and refinance the economy, and a genuine hurdle to hitting the seven per cent growth target for this year, as increasing government intervention reflects,” adds Botham.

Further to fall?

The analysts are not exactly confident the actions by the central bank will work. Bank of America Merrill Lynch said the People’s Bank of China may have “crossed the rubicon” and risks “hurting its credibility”.

Mark Williams at Capital Economics says the Chinese authorities are in a “state of panic”.  “But it is too late … the damage was done when the bubble was allowed to inflate,” he told the Financial Times.

Russ Koesterich, BlackRock’s global chief investment strategist, says: “Given that the momentum has been broken and China's equity market is still trading at a significant premium to its average valuation, for now we would avoid aggressively buying into the decline.