China's market fix starts to bear fruit

Shanghai Composite Index surges but the number of listed companies that have halted trading now stands at roughly 1,400.

Beijing’s efforts to shore up its financial system finally started to bear fruit on Thursday, with the Shanghai Composite Index posting its biggest gain in six years.

The benchmark Shanghai Composite Index advanced 5.8% to close at 3,709, its biggest percentage gain since 2009. Meanwhile, the tech-heavy Shenzhen Composite Index closed the day up 4.25%, its first jump in seven days.  

In Hong Kong, the Hang Seng Index also gained 3.73%, while the China Enterprises Index was up 3%.

Thursday’s surge followed a new series of measures to try and stem the market rout.

Shortly after the open, China’s banking regulator said it would allow lenders to renegotiate maturity terms for stock collateral loans and encouraged banks to offer capital to firms planning to buy back their own shares.

Separately, the People’s Bank of China said it had provided “abundant liquidity” to China Securities Finance Corporation, the only official margin lender for brokerages, to help stabilize the market, the official Xinhua News Agency reported.

However, as of Friday, the number of listed companies which halted trading stands at roughly 1,400, according to Shanghai-based data provider Wind Information. Analysts at Citic Securities said the sell-off could easily trigger more margin calls since many major shareholders have collateralised shares. 

Bond market impact

Beijing’s measures also appear to have helped tranquilize the onshore bond market. Pressures started building on Wednesday, with debt being offloaded to raise cash and enhance liquidity.  

One fixed-income portfolio manager at Citic Securities told FinanceAsia the domestic bond market had initially held up well during the crisis with investors gravitating back towards it, particularly after the China Securities Regulatory Commission halted initial public offerings.

“Investors were looking for less risky investment products such as bonds,” he commented. “But after the markets plunged again on Wednesday many rushed to sell bonds such as the fixed income elements of structured funds.

“They just wanted to cash out as much as possible,” he added.

One Hong Kong-based debt capital markets banker also agreed. “Investors were panicking and selling off bonds to raise capital to meet margin calls,” he said.

Analysts at Haitong Securities believe the bond slump “reflects market concern over liquidity risks. The contagion could even spread to the safest government bond market,” they wrote in a note on Thursday.

So far government bond yields have tightened as investors head for the ultimate safe haven. Benchmark 10-year yields have fallen from a recent high of 3.653% on July 3 to 3.48% on Wednesday and 3.45% on Thursday.

Hitting the real economy?

Many Western analysts also believe the impact of the crisis on the real economy could still be fairly muted.

In a research piece published earlier this week UBS pointed out that equities still only account for about 12% to 13% of household financial wealth compared to more than 50% in deposits.

The Swiss bank also added that equity still plays a fairly minor role in financing the real economy although the government had been hoping to change that until the recent A-share collapse.

“In 2014, equity financing made up only 2.6% in new total social financing,” it wrote. It added that while the ratio jumped to 4.2% during the January to May period, this still represents a very small cog in a much bigger financial wheel.

Likewise JP Morgan argued that while “China’s economy displays several leveraged red flags, there remains big pockets of excess capital at key points in the system, not to mention a captive central bank with ample policy tools and wide room to manoeuvre in a low inflation environment.”

For example, Haitong Securities chief economist Jiang Chao has called on the government to cut the reserve requirement ratio by a further 200bp to flood the system with more liquidity.

Others believe that while Thursday’s recovery may prove temporary, the market is starting to find some kind of bottom.

“Chinese investors have very good political consciousness,” concluded the Citic portfolio manager. “They’ve seen so many government organizations making huge efforts. They know it’s for real. Little by little confidence is coming back.”

Correction: An earlier version of this article incorrectly stated that 1,600 firms halted trade on China's stock exchanges. The correct number is roughly 1,400, according to Shanghai-based data provider Wind Information.

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