Unprecedented govt rescue plan to prop up valuations abruptly ran out of steam

Shanghai, July 27

Chinese shares tumbled more than eight per cent today as an unprecedented government rescue plan to prop up valuations abruptly ran out of steam, throwing the viability of Beijing’s efforts to stave off a deeper crash into doubt.

Major indexes suffered their largest one-day drop since 2007, shattering three weeks of relative calm in China’s volatile stock markets since Beijing unleashed a barrage of support measures to arrest a slump that had started in mid-June.

“The lesson from China’s last equity bubble is that, once sentiment has soured, policy interventions aimed at shoring up prices have only a short-lived effect,” wrote Capital Economics analysts in a research note reacting to the slide.

The CSI300 index of the largest listed companies in Shanghai and Shenzhen plunged 8.6 per cent, to 3,818.73 points, while the Shanghai Composite Index lost 8.5 per cent, to 3,725.56 points.

China’s market gyrations have stoked fears among global investors about the broader health of the world’s second biggest economy, hitting prices of growth-sensitive commodities such as copper, which fell today to not far from a six-year low.

Stocks fell across the board today, with 2,247 companies falling, leaving only 77 gainers.

More than 1,500 shares listed in Shanghai and Shenzhen dived by their 10 per cent daily limit, led by index heavyweights including China Unicom, Bank of Communications and PetroChina.

All traded index futures contracts also fell by their maximum 10 per cent limit, with the exception of a few tracking the large cap SSE50 index, which declined around nine per cent.

Analysts struggled to explain the severity of the sell-off, which accelerated sharply in the afternoon session, long after investors had had time to digest the latest economic releases.

Markets had opened down more than two per cent, following lacklustre data on profit at Chinese industrial firms today and a disappointing private factory sector survey on Friday.

But Chinese stock investors have been celebrating bad economic news for months on basis it would provoke more aggressive policy easing, seen as positive for stocks because it pushes cheap money into the market.

Some saw the government-induced recovery in share prices in recent weeks as itself provoking the crash.

“After two weeks of steady rebound, both foreign investors and domestic institutions are gradually taking profits, increasing selling pressures,” said Yu Jun, strategist at Bosera Asset Management Co.

“In addition, investor confidence hasn’t fully recovered. There has been no obvious increase in outstanding margin loans, while the amount of fresh capital inflows is much lower than the average level in May and June. With not enough money taking up the baton, a renewed, sharp correction is inevitable.”

China’s main stock indexes had more than doubled over the year to mid-June, when a sudden swoon saw shares lose more than 30 per cent of there value in a matter of weeks.

Markets finally began stabilising again in the second week of July, due almost entirely to an all-out effort from Beijing to pump liquidity into the market while barring investors from selling off.

China’s central bank cut interest rates, brokerages formed stabilisation funds and regulators lifted restrictions on pensions and insurers investing in stocks, an implied combined total verbal commitment of nearly $800 billion.

Beijing also cracked down on ‘malicious’ short-sellers in futures market, froze IPOs to prevent a liquidity drain and looked the other way as around 40 per cent of firms suspended trading in their shares to escape the rout.

The campaign even acquired nationalistic tones at times, with local governments calling on retail investors to ‘defend stock market’ and domestic media and popular commentators expressing suspicions that the crash had been engineered by a foreign cabal.

Chinese share markets had recovered around 15 per cent from their early-July trough before today’s renewed sell-off.

However, analysts were sceptical of how long the campaign could be sustained, given the fright retail investors took at the speed and scale of a slump that wiped out as much as $4 trillion in stock market capitalisation before Beijing grabbed the wheel.

Some analysts say the primary problem is that a market that rose so sharply on the expectations of aggressive easing from Beijing is seeing diminishing returns from future loosening.