China to create $19B fund to stabilize plunging stock market

The brokerages are not planning to sell off their holdings unless the Shanghai Composite Index comes below 4,500 points. Despite those measures, the Shanghai Composite Index dropped 5.77 percent on Friday, resulting in a weekly loss of 12.9 percent.

China has curbed the sale of newly issued stock and created a market stabilization fund, as it tries to halt a stock market plunge that is endangering the countrys economy, media report.

An online survey by fund distributor eastmoney.com over the weekend, which polled over 100,000 individuals, said investors believed stock indexes would rise more than 5 percent on Monday.

Saturday’s dramatic announcements were made after an extraordinary meeting was held by members of the State Council, China’s top decision-making body, the People’s Bank and the country’s securities regulator and other financial agencies.

On the same day, the China Securities Depository and Clearing Company announced a reduction in stock transfer fees by about 33 per cent from August 1.

Editorials by the People’s Daily have repeatedly helped lead to boom and bust in China’s stock market as they represent, or sometimes are regarded as representing, the attitude of the most senior authorities.

The China Times reported over the weekend that in the first six months executives of listed companies sold shares worth ¥477.4 billion, more than three times the amount for the whole of 2014.

The benchmark Shanghai Composite fell by nearly 30% after hitting historic highs in mid June, the biggest three-week decline since 1992.

Even though China is the world’s second-largest economy, the Chinese stock market remains largely isolated. It included the cut down in interest rates and also a relaxation in the margin lending rules.

Private investors make up the majority of traders in China, and most have little understanding of equities, so social media plays a big role in driving share prices.

“And in China, the Securities Regulatory Commission dictates the pace of IPOs; but in America, it is the investors who have the final say”.

On Saturday, China froze new share presents and arrange a market-stabilisation fund. According to Xinhua, investors who had already subscribed to the IPOs would have their money refunded.

“Around 120 billion Yuan is not enough, but if leverage (more borrowing) is used, it could expand to over 500 billion Yuan and that may have some effect, ” said Hong Hao strategist at BOCOM worldwide, as quoted by Reuters.

Crackdown on leverageChina is an unusual market in the sense that around 80% of activity is conducted by retail investors, whereas in developed Western markets, institutional investors conduct around 90% of market activity.

There remain additional steps the government could take to support the market. China’s central bank also will reportedly be providing liquidity needed to keep declines from snowballing.