According to individuals familiar with the matter, Chinese authorities are contemplating a set of measures to stabilize the declining stock market. Previous attempts to restore investor confidence fell short, leading Premier Li Qiang to call for “forceful” steps.
Policymakers aim to mobilize approximately 2 trillion yuan ($278 billion), primarily from the offshore accounts of Chinese state-owned enterprises, for a stabilization fund. This fund would be used to purchase shares onshore through the Hong Kong exchange link. Additionally, at least 300 billion yuan of local funds are earmarked to invest in onshore shares through China Securities Finance Corp. or Central Huijin Investment Ltd.
Other options are also under consideration, and announcements may be made as early as this week if approved by top leadership, although plans are subject to change. The China Securities Regulatory Commission did not respond to a request for comment.
These deliberations highlight the heightened sense of urgency among Chinese authorities to address the recent market selloff, which pushed the benchmark CSI 300 Index to a five-year low. Stabilizing the market is crucial for calming the nation’s retail investors, many of whom have been affected by the prolonged property downturn, to maintain social stability.
The gauge of Chinese stocks listed in Hong Kong surged up to 3.8%, the most since Nov. 15, after hitting near 19-year lows on Monday. The onshore benchmark CSI 300 rebounded from a 1% decline to edge higher. Both onshore and offshore yuan reversed earlier losses, while yields on the 10-year government bond rose by one basis point to 2.5%.
However, the effectiveness of these measures in ending the market decline is uncertain due to challenges like the property crisis, depressed consumer sentiment, declining foreign investment, and reduced confidence among local businesses. Past efforts in 2015 to shore up the stock market were insufficient, and authorities have been hesitant to implement major economic stimulus measures.
At a State Council meeting on Monday, chaired by Premier Li, the cabinet received a briefing on capital market operations and related considerations, according to an official statement that lacked details on Beijing’s plans.
Li Weiqing, a fund manager at JH Investment Management Co., noted, “This is a massive boost to confidence,” but the sustainability of gains remains uncertain.
Over $6 trillion has been wiped out from the market value of Chinese and Hong Kong stocks since the peak in 2021, presenting a significant challenge for Beijing in restoring investor confidence.
China’s recent moves to boost market sentiment were met with despondency from traders, leading some to call for more forceful stimulus. Beijing has imposed restrictions on short selling, and state funds intervened to buy shares of major banks. The idea of a state-backed stabilization fund has been under consideration since at least October, though doubts have been raised about its efficacy.
President Xi Jinping’s increased control over private enterprise has contributed to declining confidence in China’s markets. International banks are scaling back their expansion plans in the country, given the uncertainty surrounding the world’s second-largest economy.
Marvin Chen, a strategist at Bloomberg Intelligence, stated, “The potential support package should be able to stem declines in the short term and stabilize markets into the Lunar New Year, but state buying alone has historically had limited success in turning around market sentiment if not followed up by further measures.”
During the 2015 market rout, China Securities Finance Corp. played a key role in stabilization. However, this time, officials are looking to use offshore funds to minimize the impact on an already weakening yuan.
The stock market turmoil in China is also affecting snowball derivatives, structured products promising bond-like coupons within a specific range. The CSI Smallcap 500 Index, a pricing reference for these products, declined 4.7% on Monday, potentially triggering widespread losses on the snowballs.
Citic Securities Co., the nation’s largest brokerage, halted short selling services for some clients last week following regulatory guidance.
