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China unleashes S$660b margin trader to end stock-market rout

BEIJING — China has created what amounts to a state-run margin trader with 3 trillion yuan (S$660 billion) of firepower, its latest effort to end a stock-market rout that threatens to drag down economic growth and erode confidence in President Xi Jinping’s government.

BEIJING — China has created what amounts to a state-run margin trader with 3 trillion yuan (S$660 billion) of firepower, its latest effort to end a stock-market rout that threatens to drag down economic growth and erode confidence in President Xi Jinping’s government.

China Securities Finance (CSF) can access as much as 3 trillion yuan of borrowed funds from sources including the central bank and commercial lenders, according to people familiar with the matter. The money may be used to buy shares and provide liquidity to brokerages, the people said, asking not to be named because the information was not public.

While it is unclear how much CSF will ultimately deploy into China’s US$6.6 trillion (S$9 trillion) equity market, the financing is up to 25 times bigger than the market support fund started by Chinese brokerages earlier this month. That is probably enough to restore confidence among China’s 90 million individual investors, says Bocom International Holdings, the international investment banking and securities business arm of China’s Bank of Communications.

The Shanghai Composite Index jumped 3.5 per cent yesterday, capping a two-week rally that has turned it into one of the world’s best-performing equity gauges.

After investor confidence was rattled by a 30 per cent crash in the stock markets last month, the government has deployed CSF as a conduit for injecting rescue funds into the stock market. The index has recovered about 15 per cent since its low point on July 10, but the magnitude of state support suggests the rally is largely a government-driven phenomenon.

“It doesn’t have to use up all the money, as long as it can make the rest of the market believe that it has enough ammunition,” said Mr Hao Hong, a China strategist at Bocom International in Hong Kong. “It is a game of chicken. For now, it seems to be working.”

CSF, founded in 2011 to provide funding to the margin- trading businesses of Chinese brokerages, has transformed into one of the key vehicles for the nation’s stock-market rescue package. At 3 trillion yuan, its funding would be about five times bigger than the new proposed bailout for Greece and exceed China’s 2.3 trillion yuan of regulated margin finance during the height of the stock-market boom in June.

“What the authorities are demonstrating to the market is that if panic does take hold, they have the resources at their disposal to deal with that,” said Mr James Laurenceson, the deputy director of the Australia-China Relations Institute at the University of Technology in Sydney.

“Monetary authorities around the word regularly send the same signal in credit and foreign exchange markets.”

CSF had 2.5 trillion yuan to 3 trillion yuan of funding available as of this week, with the exact amount constantly changing, the people familiar with the matter said. No comment was immediately available from CSF, while the central bank did not respond to a fax seeking comment. Caijing magazine earlier reported that banks had given credit lines of as much as 2 trillion yuan to CSF. The well-known Chinese financial magazine said that the country’s sixth-largest lender by assets, China Merchants Bank, provided the largest single loan, at 186 billion yuan.

STRONG INTERVENTION

Chinese policy makers have gone to unprecedented lengths to put a floor under the market as they seek to bolster consumer confidence and prevent soured loans backed by equities from infecting the financial system. Over the past few weeks, they have banned large shareholders from selling stakes, ordered state-run institutions to buy shares and let more than half of the companies on mainland exchanges halt trading.

China is not the only market with a history of intervention. Hong Kong authorities bought US$15 billion of shares to prop up prices during the Asian financial crisis in 1998, while the United States Securities and Exchange Commission temporarily banned short selling of some stocks during the global financial crisis seven years ago.

America’s Congress authorised US$700 billion for the so-called TARP programme in 2008 to help re-capitalise the nation’s banking system. It also granted the government power to take over mortgage-finance companies Fannie Mae and Freddie Mac, an authority that then US Treasury Secretary Henry Paulson equated to having a “bazooka”.

While the measures in China have helped support stock prices, critics say intervention undermines the country’s pledge to increase the role of markets in the world’s second-largest economy. “The downside of the government’s recent aggressive moves is that it’s moving backward in terms of market liberalisation,” said Shanghai-based analyst at Phillip Securities Research Chen Xingyu. “It’s creating moral hazard in the market as investors are reassured that the government will step in.”

One of the biggest hurdles to sustaining gains in Chinese shares may be that they are simply too expensive given the nation’s slowing economic growth. The median trailing price-to-earnings ratio on mainland bourses is 66, higher than in any of the world’s 10 largest markets. Concern that valuations are still too rich helped fuel a record stretch of foreign outflows via the Shanghai-Hong Kong exchange link over the nine days ended on Thursday.

Mr George Magnus, a senior independent economic adviser to UBS Group AG, said on Thursday that the Shanghai Composite may drop as much as 35 per cent because its rally was never justified by the growth outlook. While the stock-market boom helped China’s economy expand a faster-than-estimated 7 per cent in the second quarter, annual growth of that magnitude would be the slowest since 1990.

For Mr Chen Gang, chief investment officer at Shanghai Heqi Tongyi Asset Management, the CSF funding buys time for policy makers to put the market on more solid footing by reducing the use of unregulated margin finance. Eventually, it will convince mainland investors to put cash back into stocks, he said. “Once the confidence is back, money that’s staying on the sidelines will start to trickle in,” Mr Chen said. “I would say there’s no battle that the Chinese government can’t win.” BLOOMBERG

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