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Beijing caught off-guard by its own creation

The harder Chinese authorities try to slow the nation’s stockmarkets slide, the more it looks like they are losing control.

 

Since the last week of June, the Chinese government has intervened in the country’s stockmarkets nearly every day to slow their steep slide. But the harder Chinese authorities try, the more it looks like they are losing control.

The Shanghai Composite Index fell is down almost one-third from its peak on June 12. Since then, $US3.5 trillion ($4.68 trillion) in value has been erased from companies in the benchmark index — or nearly five times the size of Apple.

China’s bond market and currency also began to get hit this week as worries deepened that a contagion from stockmarket losses could further trammel the country’s slowing economy. It felt even more ominous because Chinese officials had rushed out another raft of emergency measures to reassure the market.

The moves only heightened what is turning into an epidemic of anxiety among Chinese investors and a crisis of confidence in their leaders.

“The more the government intervenes, the more scared I am,” said Li Jun, who runs a fishing and restaurant business in the eastern city of Nanjing. He has spent about 3 million yuan ($646,000) on stocks, using borrowed money for about one-third of the total.

Mr Li has sold some of his investments every time the market “popped up a little” following a rescue announcement by the Chinese government. He said he had “no faith” in its ability to halt the losses.

Wednesday’s drop left the Shanghai index down 32 per cent from its peak and at its lowest level since March. However, by late yesterday both markets had clawed back some losses, with Shanghai up 1.3 per cent and Shenzhen up 3 per cent on the session.

The latest drastic step by Beijing is a six-month ban on stock sales by controlling shareholders and executives who own more than 5 per cent of a company’s shares. Any violation of the rule, announced on Wednesday night, would be “treated seriously”, China’s securities regulator said.

Early yesterday, China’s central bank said it had provided “ample liquidity” to a company owned by the country’s top securities regulator. The company was lending the funds to securities firms, which then would use the money to buy stocks.

The Chinese government has been praised for driving decades of economic growth and keeping the economy strong during the global financial crisis. In recent years, authorities have struggled with rising debt levels and the need to reform the economy away from government-driven infrastructure programs and towards consumer spending.

As it fought slower growth and a weakening real estate market, the government turned its attention to the country’s languishing stockmarkets. But Beijing’s inability to stop the recent decline has rattled investors who have long been used to seeing the government use its power to control markets.

“Beijing’s latest bid to calm the market has had the opposite ­effect,” said Bernard Aw, market analyst at IG Group. “The panic is spreading, and authorities appear to be grasping at straws to hold back the tide.”

One worry is that bruising stockmarket losses could force millions of Chinese investors to rein in personal consumption, which might hurt companies that sell goods in China.

The government’s struggle to prevent distress from spreading is a sign of how much it fuelled runaway investor optimism in its push to drive share prices higher.

Just a year ago, stocks were languishing at multi-year lows, and few Chinese savers saw stocks as a good investment. The real ­estate market, where many Chinese put their money, was slowing. Beijing hoped to use a rallying stockmarket to boost the economy and speed economic reform.

The stockmarket’s rally began in November, when Beijing cut interest rates and granted international investors unprecedented access to its main stockmarket in Shanghai. Local investors interpreted the move as a vote of worldwide confidence.

Along the way, though, Chinese authorities put more power in the hands of millions of individual investors by making it much easier for them to buy shares with borrowed money. Individual investors account for 80 per cent of all transactions in Chinese markets.

The resulting spike in margin loans has come back to haunt Beijing. Outstanding margin loans reached a record 2.27 trillion yuan as of June 18, up from 1.03 trillion yuan at the start of this year — and a roughly fivefold increase in the past year.

When investors began to dump stocks in mid-June, that margin debt created a spiral down.

Beijing seems to have been caught off-guard by the monster it helped create.

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Original URL: https://www.theaustralian.com.au/business/the-wall-street-journal/beijing-caught-offguard-by-its-own-creation/news-story/211da583168d5364dd1947322a624866