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Oh CSFC, Oh CSFC, where art thou?

With Chinese markets heading further south on Tuesday after yesterday’s plunge, the question whether Beijing’s intervention is working gets louder. As a corollary, we may also question if the intervention has actually made things worse.

Shenzhen stock exchange
Source: Bloomberg

Central banks in the US, Europe and Japan have intervened in the domestic stock markets during distressed times. However, the scope of involvement typically focus on buying shares via demand-side measures. The manner of China’s intervention is heavy-handed, and to speak truthfully, screams of panic.

The magnitude of Beijing’s involvement is seemingly mismatched from the expected impact on the real economy. If you believe the findings of the recent China Household Finance survey carried out by the Southwestern University of Finance and Economics in Chengdu, China, 9% of Chinese households actively traded shares. Furthermore, only 6% of these stock traders borrowed money to do so. This suggested the so-called wealth effect risks channelled from the recent stock slump may not be that big a deal. In this vein, could the Chinese authorities be over-reacting? Could they have leave the market forces alone to determine what the equilibrium level is? Or perhaps they know more intimate details than we do?

There is an estimated 90 million retail investors in China, and Credit Suisse calculated that around 80% of urban Chinese households have dabbled in equity, which means around 30% of their collective money tied up in stocks. If this is true, it makes more sense for the Chinese government to be acting this concerned. This explains why they are taking such extraordinary measures to stabilise the market.

Perhaps of a greater concern arising from the recent stock market farce is the stark fact that the Chinese may not be sufficiently ready to step into the arena of developed equity markets. Ironically, liberalising the A-shares market may actually bring much needed stability, as institutional investors as well as professional traders account for a greater proportion of the trading volume. However, the government probably need to be able to stomach the volatility in the transition period. Since being comfortable with short-term instability is not its forte, I don’t see that happening, as long as the government do not feel that it is in control.

Monday’s plunge showed the Chinese authorities that even governmental measures have their limits. It’s anybody’s guess what else they can do to shore up market sentiments. China has been directing support measures to two main objectives, namely, boosting demand and curbing supply. On the demand side, they have thrown money at the equity markets, getting local brokers and mutual funds to come up with funds to buy stocks. On the supply side, they have suspended IPOs, permitting trading halts, imposing a restriction on short-selling, and threatening investors of the consequences of ‘malicious’ stock sales.

My best guess is that they may continue doing all of the above, including increasing the magnitude, if necessary. The Shanghai and Shenzhen markets ended in red today, although it is interesting to note that China A50, which comprises the biggest blue chips in the country, closed up mildly. This is scant comfort, and serves as a testament that the support measures are losing their effect.

In the meantime, we would continue to see a sideways grind in the Chinese markets. Traders should be extremely cautious on breakout volatility. Our chief market strategist Chris Weston observed that the line in the sand for the Shanghai Composite seems to be drawn at the 200-day moving average at 3,533, so any declines towards the 3,500 mark may attract ‘buyers on dips’.

Singapore stocks lower

With little domestic direction to guide local shares, Singapore investors took cues from regional sentiments. Another sell-down in the Straits Times Index (STI) is seen, with prices taken swiftly below 3300. As of 4.31pm, the STI added another 0.8%, to its 1.2% losses on Monday. Noble headed to a fresh six-year low at SGD 0.59. Clearly, the sustained share buybacks are losing the fight against the gloomy commodity outlook.

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