China’s leaders are winding down a strategy of trying to push up slumping stock prices by spending billions of dollars to buy shares.
After the Chinese market benchmark soared to a peak on June 12 and then reversed course and plunged 30 percent, Beijing reached back to the era of central planning and intervened directly. Big shareholders were barred from selling and state-owned brokerages promised to buy. State banks lent billions of dollars to a government finance company to support prices.
That prompted criticism that Beijing was disrupting the market and might be delaying changes in financial policy needed to support China’s slowing economy.
Now, with no formal announcement, there has been no large-scale buying by the China Securities Finance Corp. despite four days of precipitous declines that wiped 22 percent off the Shanghai Composite Index.
”The market self-adjustment is a good thing,” said JP Morgan economist Haibin Zhu. ”The positive sign is the ‘national team’ no longer intervenes and keeps buying, which was causing market distortion.”
So what other options do Chinese authorities have to calm markets?
After weeks of turmoil, the best tactic might be to do nothing, according to financial analysts.
Inaction ”would likely be viewed favorably at this stage,” said Linda Yueh, an economist at the London Business School. ”Previous interventions have heightened rather than subdued the volatility.”
The previously little known CSFC, the pillar of the government’s intervention, never disclosed what and when it bought or how much it spent. But Chinese media say state-owned banks have lent the company 1.5 trillion yuan ($240 billion).
Its last large-scale action might have occurred last Wednesday, when the Shanghai index fell 5 percent but reversed course in the last minutes of trading to close up 1.2 percent. Analysts said that probably was the work of the CSFC and its multibillion-dollar war chest.
Already, the company said two weeks ago it would no longer intervene day to day as the government tried to restore normal market functions.
The consensus among Chinese leaders ”appears to be that this was costing the government too much money,” Angus Nicholson of IG Markets said in a report.
”Now I think they are trying to just slow down the fall,” said Jackson Wong, associate director at United Simsen Securities Ltd. in Hong Kong.
The Shanghai market soared more than 150 percent starting late last year after state media said shares were inexpensive. That led investors to believe Beijing would step in to prop up prices if necessary.
The bubble burst after an unrelated change in banking rules in early June made investors think Beijing’s support might be weakening.
The massive intervention might have interfered with decisions about interest rate and credit policy changes needed to support the slowing economy, said Zhu.
”It’s difficult to manage all their objectives at the same time,” he said. ”I would say the stock market decline is the least important among all of them.”
The vast sums of money channeled into the share-buying operation also might have diverted credit from commercial borrowers, possibly eroding potential economic growth.
One way to reassure investors, analysts said, would be to show support for the economy by cutting interest rates or freeing up money for lending by reducing the level of reserves banks are required to hold.
The central bank took both steps late Tuesday, announcing China’s fifth interest rate cut in nine months and reducing bank reserve levels.
The change probably ”was triggered by concerns about negative sentiment following the equity rout,” said Mark Williams of Capital Economics in a report.
And Beijing still has plenty of cash if it wants to buy more shares, said Guo Tianyong, a finance specialist at the Central University of Finance and Economics. But he noted that when global stock markets fell Monday there was no talk of intervention by other governments.
”We should let the market play its role,” said Guo. ”It’s unnecessary for the government to intervene.”