BEIJING—China's aggressive response to plunging share prices
undercuts its pledge to have the market play a decisive role in the
economy and risks cementing investors' belief that Beijing will
always bail them out.
Over a tense weekend, the government oversaw several steps to
stem the selling frenzy that has seen the benchmark Shanghai
Composite plunge 29% in three weeks. Brokerage firms, mutual-fund
managers and a government investment arm pledged to buy stocks, new
share offerings were suspended, foreign stock quotas increased, and
the central bank vowed to provide liquidity to help investors
borrow to buy shares.
While the flurry of rescue moves may stem the short-term panic,
some economists warned it could encourage another asset bubble if
not implemented carefully, as investors are likely to conclude that
Beijing will make good on even reckless investments.
"You could've been excused as a punter for thinking there was no
downside risk here," said ING Group economist Tim Condon.
The Shanghai Composite Index opened 7.8% higher Monday and it
looked like the all-out government mobilization would decisively
lift stocks. But the index quickly pared those gains. It ended only
2.4% higher and even spent part of the day in negative territory.
Investors and analysts said heavy buying of major blue chips like
state-owned banks and energy firms late in the session appeared to
be the work of state-backed funds. The smaller Shenzhen Composite
fell 2.7%.
China is hardly the first to move in when markets tank. But some
economists say leaders may have overreacted as systemic risk in
China from the recent stock plunge is low, and far from comparable
to the volatile events that had set off the 2008 global financial
crisis and prompted the U.S. Federal Reserve to pull out all the
stops.
"They probably panicked," said Socié té Gé né rale economist
Klaus Baader. He questioned the wisdom of directing monetary policy
at stock markets. "A market in which authorities intervene is very
dangerous. If the market wants to correct and you throw spanners in
the works, it breeds instability."
Shanghai shares are still 50% higher than at the start of the
rally and up 14% this year. Stock-market investors are a small
segment of Chinese society. Banks, at least on paper, are not
hugely exposed. And many of those holding large margin positions
are high-net-worth individuals, economists said, making a collapse
in consumer spending unlikely.
Well-functioning equity markets are fostered with policies that
strengthen the financial and economic architecture, not with those
that meddle with prices, some economists said.
"China needs to first strengthen its supervision over margin
financing, especially those outside of regulatory control," said
OCBC Bank economist Dongming Xie. "Then it needs to boost economic
growth, the foundation of a healthy stock market."
China's dramatic bid to put a floor under the selloff may have
been shaped by a desire, after encouraging the market to
appreciate, to appear in firm control of the economy, some
said.
"Many say it's a systemic risk," said Industrial Securities Ltd.
chief strategist Zhang Yidong. "I believe it's more political risk.
The top authorities are fretting that the sharp pullback could lead
to social unrest."
The rout has also threatened China's bid for the sort of
well-capitalized market that can allow struggling state-owned
companies to replace debt with equity.
Much of the state funds being funneled into the market could end
up expanding government ownership since much of the buying is
likely to go toward buying shares of state firms given their
relatively low price-equity ratios and reputation as stable
investments. And the move by China's central bank to indirectly
help investors borrow to buy shares could worsen the risk from
margin financing that authorities had tried to stem, economists
say.
Henry Luo, a 24-year-old student and new investor from Hunan,
said he was heartened by the government's supportive moves Monday.
"Markets kept falling because many people lost confidence," he
said. "I'll sell if I can recoup my money. Otherwise I'll leave it
in the market as a long-term investment."
Among the options open to Beijing in coming weeks if markets
continue falling include directing state-owned companies to buy
more of their own stock and deploy more central bank funds for
share buying, economists said. Also possible: another broad
interest-rate cut and reductions in required bank reserves after
last month's double cut.
As part of confidence-boosting measures, asset-management units
of leading security firms have pledged to hold shares until the
Shanghai index reaches 4500, some 700 points over Monday's 3775.90
close. Some read this as a de facto government target, raising
concerns. "At that level, valuations will be relatively stretched
again," said Cré dit Agricole CIB economist Dariusz Kowalczyk.
"That's the trouble with setting a target. Investors will see it as
a good level to sell into."
Beijing's effort to make its markets more attractive to
international investors and position the yuan as an international
currency may also have been set back this weekend, some said.
"They need to have a market that's reasonably transparent, that
works by the rules most markets work by, not facing intervention by
policy markets," said Socié té Gé né rale's Mr. Baader. "This
destroys confidence in the market and does long-lasting damage in
attracting international capital. That's not going to endear the
market to global investors."
Grace Zhu and Rose Yu contributed to this article.
Write to Mark Magnier at mark.magnier@wsj.com
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