Beijing fights market fires as government funds prop up share prices

China has started 2016 in fire-fighting mode. After three months of calm in the nation’s $6.5trn (€5.98trn) stock market, a 7% rout to open the new year prompted government funds to prop up share prices yesterday.

The central bank injected the most cash since September into the financial system, to curb borrowing costs, and intervened in the currency market to prevent excessive volatility.

With Chinese shares and the yuan posting their worst starts to a year in two decades, the ruling Communist Party is struggling to let markets have more sway in the world’s second-largest economy.

Private data, this week, showed the nation’s manufacturing sector ended last year with a 10th straight month of contraction, amplifying concern that the weakest economic growth in 25 years will fuel capital outflows.

“There’s no doubt China wants to liberalise markets, but it’s happening at such a time that it’s very difficult to do in an orderly manner,” said Ken Peng, a strategist at Citigroup in Hong Kong.

The authorities are also concerned that sinking asset prices will weigh on business and consumer confidence.

Capital outflows from China swelled to an estimated $367bn in the three months ended November.

The stock market’s sell-off on Monday was triggered by this week’s disappointing manufacturing data, along with investor worries about an expiring ban on stake sales by major shareholders.

Those concerns eased yesterday, as regulators plan to keep the restrictions in place beyond January 8.

To support share prices, government funds targeted companies in the finance and steel sectors, among others.

The plunge on Monday triggered the nation’s circuit breakers, dealing a blow to regulatory efforts to restore calm to a market in which individuals drive 80% of trading.

The CSI 300 Index of large-cap shares rose 0.3% at the close on Tuesday.

“Unfortunately, I think the reality is that we still need some of that state support or intervention, partly because of the investor base you have in China,” Tai Hui, the Hong Kong-based chief Asia market strategist at JPMorgan Asset Management, said.

Policy-makers went to extreme lengths to prop up share prices in the midst of a $5trn rout last summer, including ordering equity purchases by state funds, suspending initial public offerings, and allowing trading halts that froze hundreds of mainland-listed shares.