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China Markets Plummet Despite Government Intervention


Investors look at computer screens showing stock information at a brokerage house in Shanghai, China, July 8, 2015.
Investors look at computer screens showing stock information at a brokerage house in Shanghai, China, July 8, 2015.

China's government on Wednesday unveiled more measures to stop a 30 percent stock market decline in recent weeks, but the action had little impact as the securities regulator warned of “panic.”

About half of all companies listed on China’s two exchanges have now filed for a trading halt, freezing about $1.4 trillion worth of shares. More companies that experienced a 10 percent drop in their share price also had trading suspended on the Shanghai and Shenzhen exchanges.

The government ordered state-backed companies to stop selling shares, and urged executives and investors to buy shares on the market.

Despite the drastic action, the Shanghai Composite Index closed Wednesday's session down 5.9 percent, its biggest one-day decline since 2007, after plunging as much as 8.2 percent during the day.

The Shenzhen Composite, tracking all the top shares on that exchange, was off 2.94 percent at the close.

'Irrational selling'

The measures halting trading on many stocks has made it difficult to gauge how many investors are trying to offload shares, but China’s security regulator, which has pledged to shore up the market, warned Wednesday of “irrational selling.”

In Hong Kong, where nearly 800 mainland companies are listed, the Hang Seng index closed plunged 1440 points to close 5.84 percent lower. The Taiex, composed of all shares on Taiwan's exchange, finished the day down just under three percent.

“The big problem in China right now is there are only sellers. There are no buyers,” said Francis Cheung, head of China and Hong Kong strategy for CLSA Asia-Pacific Markets.

“One thing that's quite sure is that the government's buying is going to escalate until they actually stabilize the market. I do believe the government has the firepower to do so. The question is at what level do we stabilize?” Cheung said.

A man leaves as stock investors monitor the stock prices at a brokerage house in Beijing, China, Wednesday, July 8, 2015.
A man leaves as stock investors monitor the stock prices at a brokerage house in Beijing, China, Wednesday, July 8, 2015.

China on Wednesday also made it more difficult to short futures, part of a campaign to keep stock prices from continuing to fall despite analysts' warnings of the long-term consequences.

“Every effort to eliminate volatility carries the risk of future volatility,” said finance professor Michael Petis at Peking University.

Watching markets

The People's Bank of China, in a statement on Wednesday, said it was watching markets closely and would guard against systemic regional financial risks.

Some market observers predict the Chinese equities turmoil could emerge as a bigger risk to the global economy than the eurozone crisis.

But CLSA's Leung in Hong Kong observes that Chinese retail investors are still sitting on significant stock market gains from the rally that ran from the end of last year until the middle of last month.

“So the impact on the economy I don't think it will be very large. Except it will be negative for consumer confidence, which actually could have a negative impact on consumption,” Leung told VOA. "So it's more negative on a sentiment perspective. I don't really see much systemic risk at this point.“

Roger Tan, CEO of Voyage Research in Singapore, points out China's markets are dominated by unsophisticated individual investors who account for about 85 percent of trading and are now getting a painful lesson.

'You get burned'

“If you don't manage your risk properly, then you get burned. And some of them get burned very, very badly,” Tan told VOA. “And I do hear of a lot of stories that a lot of investors have been burned badly. Half of their savings or all of their savings have been wiped out.”

Tan explained China's government must share some of the blame because it essentially encouraged novices to play the markets as an alternative to the country’s enormous underground loan-sharking businesses.

“That's why we saw a huge amount of liquidity, a huge amount of interest into the stock markets,” Tan said.

The China market crash on Wednesday has seriously worried investors across Asia, who had been more focused the past week on the ongoing Greek financial crisis.

Japan's benchmark Nikkei 225 index fell nearly 640 points to close down 3.14 percent, its largest single-day drop in more than a year. Analyst say Japanese shares also came under pressure as the yen rose against the dollar, which hurts the country's exporters.

South Korea's Kospi finished 1.18 percent lower.

Economic uncertainties

The situations in both Greece and China are fueling economic uncertainties, South Korea's finance minister said Wednesday.

"South Korea has taken steps to shore up its economic fundamentals after past crisis situations and is now in a good position to deal with emergencies," said Choi Kyung-hwan.

Australia's investment benchmark, the S&P/ASX200 dropped 2 percent.

The market in the mineral-rich country also came under pressure by a further collapse in commodity prices – especially iron ore – which sent the Australian currency to a fresh six-year low against the U.S. dollar.

In Thailand, the baht also fell to a six-year low against the greenback.

The Thai currency has lost more than 4 percent of its value in the past three months as global funds cash out of the kingdom's stock and bond markets.

Reporter Saibal Dasgupta also contributed reporting from Beijing.