A massive operation to steady China’s stock market appears to be finding its footing as shares rebounded again on Wednesday, with Shanghai’s main index closing up nearly 2.3 percent.
But the government moves limiting volatility and encouraging longer-term investment have dramatically lowered trading volume.
Some analysts see the government’s intervention as running the risk of hurting the market in the name of saving it.
According to Bloomberg news, contracts for futures trading on the CSI300 Index — a grouping of some of the country’s biggest companies — slipped to around 34,000 on Tuesday, down from more than 3.2 million in June.
Fraser Howie, co-author of the book Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise said what is happening in the futures market could spread to the equities market.
“People will say, I am not going to invest in the Chinese equities market because it is too tough to trade in there,” Howie said. “Not only that, you can have the government making the policy on the hoof and changing the rules every few days.”
Circuit breakers
Each week has brought new announcements of trading policies, which sometimes get changed again.
The latest proposed policy change for the stock market could further limit the range in which stocks could trade each day.
China stocks already have an up or down limit of 10 percent in place to limit wide swings in a market that is dominated by small investors. Authorities are now considering halting trading for a day whenever shares of companies on the CSI300 index rise or fall by 7 percent. When the index itself rises or falls by 5 percent, trading will be suspended for 30 minutes.
Oliver Rui, director of the China Europe International Business School’s World Bank China Center for Inclusive Finance, said those moves could have a cooling effect in a market that is dominated by inexperienced investors.
“I think the circuit breaker will definitely help to mitigate the volatility and stabilize the market under these unusual circumstances,” Rui said.
Despite the intense government focus on managing the market’s day to day fluctuations, Tony Hsu, chief investment officer with OTS Capital Management in Hong Kong, said those moves are unlikely to change much in the long term.
"Market forces are generally more powerful than central planners," Hsu said.
Circuit breaker measures are not uncommon, but in most cases they are in place to limit the downward slide of stock indexes.
In the United States, market-wide circuit breakers kick in when the S&P 500 Index drops below seven percent and again at 13 percent.
But with the 10 percent limit already in place, the new measures will only tighten the trading band more in both directions, slowing the time it takes for the market to eventually stabilize.
“All they seem to be doing frankly is stopping trading when you get these volatile swings,” Howie said.
Regulating up
In many ways the government’s strong intervention into the market has come at one of the most difficult times. Instead of intervening when the market was rapidly sinking, analysts say officials should have intervened when it was rising.
“China has suffered over the past couple of months a bursting bubble, because it refused to properly regulate a highly leveraged market on the way up and this is the fallout of it,” Howie said.
He said the government should have focused on improving transparency of the country’s corporations and trading practices. There also should have been more warning signs from the market regulators when share prices were unsustainably high.
According to Goldman Sachs, the government’s so-called “national team” that has been brought in to help prop up the market has already spent more than $230 billion in stimulus measures.
Economic transition
China’s stock market remains a key part of the country’s economic development, which is why authorities are so intent on rescuing it from a fall.
Oliver Rui said that right now, Chinese companies acquire more than 90 percent of their financing from banks. Less than three percent comes from the stock market. Authorities want to dramatically change that, to turn the financial markets into a more effective economic engine for growth.
“That’s why, no matter what happens, the government wants to resuscitate and rebuild confidence to keep up the momentum of the bull market,” Rui said.
