China brokerages plan $19b fund to reassure market

Twenty one Chinese brokerages will invest an aggregate $19.3b in an exchange-traded market stabilisation fund amid steep declines on mainland bourses.

Twenty one of China’s biggest securities firms will jointly invest Rmb120 billion ($19.3 billion) in a fund to “stabilise” the country’s volatile capital markets, which have plunged by nearly 30% in three weeks, according to an official statement.

Led by Citic Securities and Haitong Securities, the brokers will allocate no less than Rmb120 billion, or 15% of their combined net assets as of end-June, to establish a blue chip-based exchange traded fund (ETF), according to a joint statement issued by the brokers on Saturday.

The statement, published online by the Securities Association of China, said the brokers also vowed not to sell off their proprietary investments in the market, while agreeing to buy more shares at an appropriate time, so long as the benchmark Shanghai Composite Index is below 4,500 points.

The Securities Association said in a separate statement that it appreciated the brokers’ gesture and encouraged other securities firms to “view China’s economic situation and capital market in a correct way” and take similar actions to underpin the flagging market.

“Big ups and downs on the stock market are not good for its stability and healthy development," the association said in the statement. "As big players in the market, brokers should take responsibility and stay united to maintain market stability.”

The latest move comes after measures intended to steady the market, including the People's Bank of China's interest rate and reserve ratio requirement cuts and the China Securities Regulatory Commission's easing of rules on margin financing, failed to stem the huge sell-off.

The benchmark Shanghai Composite fell by almost 30% after hitting historic highs in mid June, the biggest three-week decline since 1992.

Since the market tumble, some 28 companies have notified the Shanghai and Shenzhen stock exchanges that they will postpone their initial public offerings, with most citing the “recent market volatility” as the reason.

Pulling the plug

The 28 companies, all of which had won approval from the securities regulator to go public, were at various stages in the IPO process.

Readers Publishing Media, which planned to list on the Shanghai Stock Exchange, was at a fairly advance stage.

“To be prudent, the company and our sponsor Hualong Securities have decided to suspend the IPO issuance,” Readers Publishing said in a notice to the exchange, adding that capital raised during the bookbuild would be returned to investors soon. 

Regulatory deja vu

On Friday, China’s securities regulator said it would slow the pace of approvals for initial public offerings and slash the amount of capital raised (through IPOs) in a bid to restore investors’ confidence in the market.

China Securities Regulatory Commission (CSRC) spokesman Zhang Xiaojun said only 10 companies will get the green light to go public on A-share markets this month. In contrast, the CSRC typically approved more than 20 IPO applications every month this year. 

“Considering the recent market conditions, the CSRC will reduce the number of IPOs and cut the size of fund raising,” Zhang said at a briefing after the market closed.

According to a recent survey conducted by domestic online portal Sina, 80% of more than 20,000 respondents think the suspension of IPOs will be the most effective way to stabilize the market.

Chinese retail investors, who account for the majority of trading, are keen to sell holdings in order to participate in initial offerings, a customary practice which can nevertheless trigger market volatility.

Zhang said China Securities Finance Corp, the country’s only official margin lender for brokerages, will increase its capital base from Rmb24 billion to Rmb100 billion, and raise additional funds from other channels for business expansion and market stabilisation.

Pros and cons

Unsurprisingly, Beijing’s efforts to prevent the market crash have received mixed reviews.

Ye Rongtian, a Chinese equities analyst with a half million followers on Sina Weibo, China's popular microblogging platform, said the stock-stabilisation fund will quickly help shore up market confidence.

“Many people say Rmb120 billion won’t be of much help for such a huge stock market, but don’t forget 3% of the market capital leads and dominates the thinking of the remaining 97%,” he wrote on his Weibo account. “That’s the difference between a group of wolves (investors) with a leader and without one.”

However, others have voiced concerns over the government’s recent tinkering.

“This is the regulators’ naked interference into brokerages’ market behavior,” Liu Shengjun, deputy director of the Shanghai-based Lujiazui International Finance Research Center, wrote on Weibo. “They are so short-sighted to change rules as to cater to investors.”

¬ Haymarket Media Limited. All rights reserved.
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