Chinese securities firms create $19B fund to support plunging market; IPOs

Bernard Aw, market strategist for IG in Singapore, said that the most significant move was the China Securities Regulatory Commission’s (CSRC) decision to allow “reasonable rollover” of margin trading positions.

The China Daily newspaper said on Friday that the CSRC was probing investors who used stock index futures to “short” the market – or bet on prices falling.

The Shenzhen Composite Index, which tracks stocks on China’s second exchange, tumbled 6.33 percent, or 148.92 points, to 2,202.48.

When Shanghai peaked on June 12 it had risen more than 150 percent over the previous 12 months, partly fuelled by margin trading – in which investors borrow cash to invest in stocks, a practice that enhances both profits and losses.

The SSEC index fell 5.8 percent on Friday to end at 3,684 points.

“This is happening against an (economic) growth backdrop that continues to look soft, as illustrated by the flat manufacturing survey this week”, noted analysts at Barclays. Meanwhile, the China Financial Futures Exchange has suspended 19 accounts in the past month for short-selling, sources told Reuters.

The boom and bust cycle in China’s equities market seems to be taking place much quicker than anticipated, sparking warnings that stock market turmoil may generate a systemic financial crisis that could spill over into the country’s sluggish economy.

“Foreign capital has only a small part of the Chinese stock market”, it said.

The measures sent Chinese stock markets soaring.

“It does come across as relatively desperate”, said Wei Hou, an analyst at Sanford C. Bernstein & Co.in Hong Kong. As the securities market regulator initiates a probe to identify possible manipulation in the market, the Shanghai Composite lost 7 percent of its crucial gains when the market closed on July 3.

One economist in Hong Kong who follows the world markets said it is in the interest of Beijing to support the stock market as it can help to facilitate deleveraging of companies and offset some pain of the slowdown in the economy.

The regulator’s move is contrary to earlier expectations that the CSRC might consider suspending IPOs to stabilize the country’s tumbling stock markets.

Official margin lending through securities brokerages increased 123 per cent this year to a high of ¥2.3 trillion on June 18, according to Macquarie Research, equal to more than 3 per cent of China’s gross domestic product.

The sell-off has raised fears that United Kingdom investors – including pension funds – could be hit.