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Stock Sell-Off Is Unabated in China Plunge in Chinese Stocks Is Resistant to Government’s Efforts
(about 9 hours later)
SHANGHAI — Stock prices in mainland China fell sharply again on Wednesday, despite another series of government measures meant to restore confidence and stabilize a market that has grown increasingly turbulent in the last month. SHANGHAI — As the Chinese stock market slumps, the country’s government has stepped in boldly, unveiling a raft of measures to prop up shares. But those efforts have done little to stabilize the market, with stocks continuing to slide on Wednesday.
The sell-off is putting pressure on the government to take swift action, as losses pile up for the millions of ordinary investors that piled into the market. Just days after Beijing introduced a number of bold measures to prop up share prices, regulators announced new initiatives Wednesday, including allowing insurers to invest more money in stocks and creating a fund to buy up shares in small and midsize companies. The losses create a political and economic challenge for the nation’s leadership.
But the slump, which is defying the efforts by Beijing to prop up stocks, presents a serious challenge for the leadership. If stocks continue to fall, it could erode consumer confidence, further weighing on the economy. Beijing could face social unrest if the sell-off accelerates, since tens of millions of ordinary investors have plowed their savings into the market. The psychological toll on investors, in turn, could erode consumer confidence, dragging down growth in the already slowing economy.
The social and political repercussions could also be significant for the government. Many ordinary investors have poured their savings into the stocks, making them especially vulnerable to the market volatility. “The stock market is connected to the real economy,” says Fraser Howie, a longtime Asia banker and co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.” “When you see such violent moves, you don’t know what kinds of ripples are going to come down.”
The losses have been brutal. And the full extent of the pain may be even steeper, since nearly half of the stocks have stopped trading. The Chinese government is moving swiftly to prevent any broader fallout.
Even after the big sell-offs, though, stock prices in China are still considerably higher than they were a year ago. The Shanghai composite is still up 74 percent from mid-2014, and the Shenzhen composite is up 84 percent since then. The country’s central bank has made extra cash available to fund share purchases. Brokerage houses have been ordered to pump billions of dollars into the market. And government-backed funds have earmarked billions more to prop up the shares of flagging companies.
On Wednesday, the main Shanghai index plunged 5.9 percent, and the Shenzhen index fell 2.5 percent. Over all, the Shanghai index is down 32 percent and the Shenzhen is off 40 percent from the highs reached in mid-June. On Wednesday, China’s Ministry of Finance even pledged to “adopt measures to safeguard the stability of capital markets,” and in particular protect state-owned financial enterprises. The move signals that this broad-based effort is being directed from the very top echelons of the state.
In Hong Kong, which had escaped much of the mainland market’s rout, the Hang Seng index fell 5.8 percent. “There are no buyers, only sellers, ” said Francis Cheung, a market analyst at CLSA, the brokerage house. “So the government is buying, and they’ll ramp up buying to stabilize the market.”
The sell-off has also spread to other parts of the Asia-Pacific region. In Japan, the Nikkei 225-stock average dropped 3.1 percent, Australian stocks were down 2 percent and South Korean shares fell 1.2 percent. Trouble is, they haven’t found the right formula.
Fear is gripping the markets after a phenomenal bull run in which mainland China’s major stock indexes doubled, tripled and even quintupled over the last few years. Sentiment has turned down too sharply and investors have lost confidence, analysts said, and because buying shares with borrowed money was a critical part of the increase in prices, there is now pressure to sell. Despite the latest batch of moves, China’s markets were battered on Wednesday. In Shanghai, prices plunged 5.9 percent. In Shenzhen, they fell 2.5 percent. The damage is also spreading regionally, to Hong Kong and Japan, where shares also fell sharply.
“China’s stock market remains under stress, as investor confidence will take some time to recover,” Li Wei, the China economist at the Commonwealth Bank of Australia, wrote in a report to investors. While the markets are still up over all for the year, the recent downward spiral is creating substantial pain. Both major exchanges are off between 30 percent to 40 percent in six weeks, putting them in bear market territory.
Panic selling may also be extending the downturn because each day trading is suspended for hundreds of stocks after they drop by 10 percent, under exchange rules. Some companies are even asking that their shares be temporarily suspended, hoping to ride out the downturn. The numbers don’t give the complete picture either. In recent days, many stocks have been halted because of exchange rules that are supposed to guard against too much misery in a single trading session. At least a third of the companies listed on the major stock exchanges had trading in their shares suspended on Wednesday.
Since late June, on almost every trading day, there have been more than 900 stock trading suspensions, according to Xinhua, China’s official news agency. On Tuesday and Wednesday, 900 to 1,700 stocks were suspended from trading. That means that among the approximately 3,000 listed companies on the two major exchanges, up to half may have been suspended during the first two days of the week. Those market dynamics can create a chain reaction of selling. China’s major exchanges prevent a stock from falling more than 10 percent on any given day. When that happens, analysts say, many investors opt for selling other shares, broadening the sell-off. Then when the market opens the next day, they continue selling down the stock that was previously halted, effectively prolonging the turmoil.
“This is wrong,” said Francis Cheung, the head of China and Hong Kong strategy at CLSA, the brokerage firm. “It just delays the correction. So it delays the downturn.” “It just delays the correction, so it delays the downturn,” said Mr. Cheung at CLSA.
The Chinese authorities have been moving swiftly, apparently worried about the potential impact the sell-off could have on the financial markets and on a broader economy that is relatively weak. In one of the biggest moves, some of the country’s largest brokerage houses created a $19.4 billion stabilization fund. While China’s stock markets have a long history of volatility, the environment is different now. The country’s economy has been sluggish. The stock market is far bigger than it has ever been, second in size only to that of the United States.
Although experts say they doubt there could be systemic damage, banks and brokerage firms could be threatened because of the huge amount of margin trading, or borrowing to purchase stocks. And aggressive investors, many of them first-time buyers of equities, have been playing a different game. They were buying stocks with borrowed funds, using leverage as if they were “barbarians at the gate.”
By some estimates, margin trading may have amounted to as much as 3.4 trillion renminbi, or nearly $550 billion. And because some of the borrowing probably took place in the shadow banking sector, no one is quite clear how big it was. The panic, in part, is being driven by concerns about the huge amount of borrowing. Some analysts estimated that margin buying reached about $550 billion, or as much as 15 percent of the value of all tradable shares on the two major exchanges.
The bubble seems to be bursting on a stock market run that began last summer. In a rally that began roughly a year before the market’s high point on June 12, the Shanghai index jumped 157 percent. The Shenzhen index rose even more during that period, rising about 208 percent. A smaller stock market in Shenzhen called the ChiNext, geared toward technology companies and start-ups, began its own bull run much earlier, in late 2012, and soared about 540 percent before the markets began to falter several weeks ago. Fear is gripping the market after a phenomenal bull run in which mainland China’s major stock indexes doubled, tripled and even quintupled over the past few years. By the time the market peaked, in early June, share prices in China were among the most expensive in the world, vastly costlier than in the United States, Europe or Hong Kong.
Based on company earnings, the prices of many Chinese stocks began looking incredibly expensive, trading at far higher prices than could be found in Hong Kong or the United States, worrying analysts and investors. Investors in mainland China, in other words, had to pay a huge premium to buy domestic shares, a sign the country’s stock market was frothy. Some analysts have noted that the price-to-earnings ratio of companies listed on China’s start-up index, called ChiNext, were far higher than those listed on the Nasdaq stock market in 2000, when the Internet bubble burst.
“It’s gone up too fast, and it’s too much borrowed money,” said Wendy Liu, an analyst at Nomura Securities in Hong Kong. “A lot of first-time equity buyers were too excited and didn’t know how to temper their excitement.” Just a few weeks ago, the pipeline of initial public stock offerings was robust. There was the promise of innovative companies that could use the capital markets, rather than the banks, as a source of capital, and the prospect of new bourses being set up for China’s technology start-ups.
The rally began to fall apart in May. Analysts say investors began to worry that share prices had grown too expensive. With concerns about risk, the government began tightening rules on margin lending. There was a flood of initial public offerings that increased the supply of companies just as demand was weakening. And there were other factors, such as listed companies reporting weaker earnings. Perhaps more troubling, insiders at many listed companies began aggressively selling shares, signaling a lack of confidence in the future price. Buybacks of stock grew less common. China’s state-run news media, including The People’s Daily, helped hype the rip-roaring market. As recently as April, news media said that the bull market had “just begun,” only to warn some weeks later of the risks.
Most analysts believe the bulk of the selling pressure is coming from investors who borrowed to finance their stock-buying binges. Since then, sentiment has soured, and investors have lost confidence. The worry, analysts said, is that it could be a prolonged downturn, like the one that began in 2007 and lasted about seven years.
“The market has too much leverage,” said Patrick Ho, a market analyst at UBS in Hong Kong. “This leverage needs to come down to a sustainable level.” The sharp decline in prices wiped out trillions of dollars in value from a market that at one point topped $10 trillion. Still, the decline has not yet erased all, or even most, of the gains. China’s major exchanges remain up about 75 percent from a year ago, in part because big state-owned companies have fared better.
Mr. Ho added that there had been a “trial and error” approach by the Chinese government to stabilize the market. The authorities are likely to introduce more measures to stimulate the economy and prevent the market from falling too rapidly, he said, like the announcement on Wednesday that a fund would be set up to buy up the shares of small and medium-size companies. Nor have global markets been roiled by the mess in China. That is partly because the “Chinese financial system is largely sealed off from the global financial system,” Derek Scissors, an analyst at the American Enterprise Institute, said in a report.
“If it doesn’t work, they’ll do more,” Mr. Ho said. For now, the action is domestically focused. China’s Communist Party leaders are trying to restore confidence and stabilize the market before things get too ugly at home, introducing new fixes nearly every day.
In late June, the government cut interest rates, which is ordinarily a good sign for stocks, since it makes them more attractive relative to bank deposits. But share prices fell anyway.
Since then, the authorities have introduced a wave of additional measures meant to prop up prices. Stock trading transactions were slashed. I.P.O.s were suspended. Huge stabilization funds were set up to purchase shares. Brokerage houses promised to buy more. And China’s insurance regulator eased rules so that insurers could more easily invest in stocks.
In the face of further selling, the government continued to introduce new measures on Wednesday.
China’s State-Owned Assets Supervision and Administration Commission, which oversees the country’s big state corporations, ordered companies with public listings not to reduce holdings of their own stock.
The China Securities Regulatory Commission even issued a notice encouraging major shareholders and executives of companies to increase their holdings of their companies’ stock, which is usually restricted. Although regulators typically restrict trading by such insiders, the government said it would loosen those controls to help “stabilize stock prices.”
It’s a “trial and error” approach, said Patrick Ho, a market analyst at UBS in Hong Kong. And more measures could come, as the authorities look to stimulate the economy and try to keep the market from falling too rapidly.