Blinking in the face of raw capitalism

Beijing has intensified its efforts to steady the country’s turbulent markets but is also denting its reformist credentials.

Beijing intensified its efforts on Wednesday to tranquillise China's A-share markets but its methods have raised question marks over how committed this communist-run country is to subjecting itself to the market disciplines of capitalism.

On its website, the People’s Bank of China said it is “actively assisting” the China Securities Finance Corporation to ensure it has ample liquidity through interbank lending, bond issuance, and collateral finance. CSF, managed by the China Securities Regulatory Commission, is the only official margin lender for brokerages.

The central bank added that it will “closely monitor” the market and continue to support CSF to hold the line against any systemic or regional financial risk.

The CSRC subsequently said that CSF had offered Rmb260 billion ($42.4 billion) in credit lines to 21 big Chinese securities firms. The brokers pledged on Saturday to invest Rmb120 billion in the shares of the big state-owned enterprises, in a bid to steady the market.

In addition, all listed SOEs promised not to sell their own companies’ shares, following a request from the State-owned Assets Supervision and Administration Commission, which called on SOEs to “shoulder the social responsibility” to prevent a market rout.

However, equity markets so far remain unimpressed by Beijing’s latest rescue efforts.

On Wednesday, the benchmark Shanghai Composite closed the day down 5.9%, while the Shenzhen Component Index dropped 2.94%. The fresh drops sent China deeper into bear market territory, extending the drop since mid-June to about 40% in the case of Shenzhen.

Large state-owned banks and enterprises, for the most part previously unscathed, plunged too. For instance, Sinopec, China’s second largest oil and gas producer, and Bank of Communication, a largest state-owned bank, fell by 10%, the maximum daily limit.

“Currently there is a panic emotion in the market and an increase of the irrational selling off of shares, resulting in an intense strain of liquidity,” Deng Ge, a CSRC spokesman, said at a briefing.

The sharp share falls on mainland China’s markets also extended to Hong Kong, where the Hang Seng Index lost 5.84%, the biggest single-day drop since 2008. The biggest fallers were mainly Chinese red chips, with Minsheng Bank, a large Chinese commercial bank, and Citic Securities, the country’s largest broker, leading the dive -- sinking 11% and 9.5%, respectively.

“This is a very natural and inevitable trend," said Raymond Yeung, a senior economist at ANZ in Hong Kong, since Chinese companies listed in Hong Kong were no different to their namesakes listed on the mainland.

Trading suspensions

What's more, by the time the Shanghai and Shenzhen markets had opened on Wednesday nearly 1,500 companies, or more than half the listed firms, had halted trading in their shares in an unprecedented (and artificial) move to halt the selling tide. Many are small and mid-cap firms.

In their filings, most companies cited “significant issues” as the reason for their requested suspensions, without further elaboration. The ambiguous phrase usually refers to a planned asset restructuring or share placement.

However, some market insiders see the temporary exodus as an example of companies trying to shield themselves from losses associated with normal, albeit dramatic, market action.

Analysts at Citic Securities said the sell-off could easily trigger more margin calls since major shareholders at some companies have collateralised shares. “If [shares] keep dropping, they are facing margin call [soon]. So they will find whatever reason to suspend [share trading] to save themselves,” they wrote in a Tuesday note to clients.

According to China’s regulatory rules, companies can generally halt the trading of their shares for up to three months, if they plan to carry out a restructuring, merger, or acquisition.

The unprecedented exodus from the market came after Chinese equity markets sank almost 30% in three weeks after hitting the year's highs in mid-June, the steepest three-week decline in more than two decades. About $3 trillion was wiped off the total value of the market, roughly 30% of China’s GDP last year.

Moral hazard

But sometimes the cure can be worse than the illness and the Chinese government’s attempted “rescue” measures have cast a shadow over its reformist credentials and drawn criticism from financial professionals and retail investors.

“These measures…are a major setback to China’s efforts of building a market-based capital market platform,” Dong Tao, regional economist at Credit Suisse, wrote in a note on Monday. “China may also slow down its pace of liberalising the capital account, which in turn is likely to create further obstacles for A-share market being included into the MSCI index.”

Yeung at ANZ echoed Dong’s comments and added that Beijing’s interventions, by exacerbating a “moral hazard problem”, would be more harmful in the long-run.

“It could benumb investors. They won’t be afraid of taking risks in the market, as they will always expect the government to rescue the market,” Yeung said. “It could actually trigger bigger risks and bigger bubbles in the future.”

But some analysts sense that a floor for the market might be near at hand in the wake of the savage pullbacks.

Those at HSBC, for example, upgraded their rating on China’s A-shares from “underweight” to “neutral”, citing amongst other things a 22% drop in the balance of margin financing since its peak in mid-June. “The worst of the deleveraging might be behind us,” HSBC said in a Wednesday note.

The UK-headquartered bank isn’t the only one to be bullish on China. Luo Wenbo, an equity analyst at Qilu Securities, one of 21 brokerage firms to have invested Rmb120 billion to stabilise the markets, also voiced a note of “relative optimism”.

“I have to say I have confidence in the government, in the market. A lot of my company’s money is there,” he said. “Without this confidence, how can I see my bonus for this year?”

Wishful thinking, veterans of boom and bust capitalist cycles in West might argue. But in China it resonated with an internet meme that went viral locally after the Chinese government stepped up its interventions in the market.

The meme, yet another adaptation of the hackneyed British WW2 slogan "Keep Calm and Carry On", read "Keep Calm and Believe in Communism." For some investors, though, such sentiments could do more damage than good.  

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