China stems stocks rout, but market still facing lengthy hangover

Beijing’s increasingly frantic attempts to stem a stock market rout were finally rewarded as Chinese shares bounced around 6% yesterday, but the costs of heavy-handed state intervention are likely to weigh on the market for a long time.

The rebound came after China’s securities regulator, in its most drastic step yet to arrest the slump, banned shareholders with large stakes in listed firms from selling.

The banking regulator said separately it would allow lenders to roll over loans backed by stocks.

The CSI300 index of the largest listed companies in Shanghai and Shenzhen raced higher to close up 6.4%, while the Shanghai Composite Index bounced 5.8% for its biggest daily percentage gain in six years.

But China’s malfunctioning stock markets remained semi-frozen, with the shares of around 1,500 listed companies worth around $2.8 trillion — roughly half the market — suspended, and many of those still trading propped up by state-directed buying.

“The authorities are capable of slowing the selling and extending market support,” said Mark Konyn, chief executive at Cathay Conning Asset Management Ltd in Hong Kong.

“However, this high level of intervention comes at a significant cost. Such intervention locks up ownership of shares, reduces liquidity and creates an overhang that could plague the market for years.”

More than 25% has been knocked off the value of Chinese shares since mid-June, and for some global investors the fear that China’s market turmoil will destabilise the financial system is now a bigger risk than the crisis in Greece.

“We are inclined to believe that Beijing will escalate policy responses until they start working,” said economists at Credit Suisse in a research note.

“If market conditions do not stabilise, we expect a statement of ‘whatever it takes’ from the Chinese government, given that social stability is at stake and financial systemic risks are evident.”

The US has voiced worries the stock market crash could get in the way of Beijing’s economic reform agenda.

European shares rose yesterday, supported by mining firms after a rally in metals and Chinese stocks, while some investors were betting Greece’s creditors will look positively at reform proposals and finally agree a debt deal.

The eurozone’s Euro STOXX 50 index rose 3.1%, while the pan-European FTSEurofirst 300 index was up 2.5% at 1,514.59 points in late-afternoon trading. Germany’s DAX advanced 2.6%, Spain’s IBEX gained 2.6% and Italy’s FTSE MIB climbed 3.8%.

In a speech to the European Parliament, Greek prime minister Alexis Tsipras called for a fair deal after EU leaders gave him five days to come up with convincing reforms.

“Investors have a glimmer of hope from the fact that in Alexis Tsipras’ speech he still refers to a deal being struck,” said Lorne Baring, managing director at B Capital Wealth Management.

“However, in the face of the Greek tragedy and China market turbulence, investors still have plenty to worry about.”

The STOXX Europe 600 Basic Resources index gained 2.1% as prices of major industrial metals rose on signs of stabilisation in share markets in China, the world’s biggest metals consumer.

Reuters