China’s A-share market began the last quarter of the year with a tumble, but managed to recover later despite continued losses on bourses in the Asia-Pacific neighborhood.
The recovery was fueled mainly by a slew of measures proposed by the country’s top financial regulators to stabilize the market and the Chinese economy. Also, emerging clarity on their intent to bolster the capital market helped, said analysts.
From Sept 28 to October 18, the benchmark Shanghai Composite Index moved down 11.9 percent to 2486.42 points, and since then further rose by 7.7 percent, or 192.69 points, to 2679.11 points as of Nov 16.
On Oct 19, the three top financial regulators－the People’s Bank of China, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission－vowed measures to mitigate pledged-share risks.
“The recent slump was mainly driven by weak investor sentiment closely related to pledged-share risks, so the risk-easing measures and regulators’ determination to solve the problem could greatly buoy the market,” said Xu Gao, chief economist with the Everbright Securities Asset Management Co Ltd.
Share-pledging refers to shares being pledged as collateral for loans. The recent broad decline in the stock market highlighted the risk of large-scale selling of pledged stocks by some listed companies’ lenders.
Besides tackling the short-term threat, the regulators promised measures to spur the market’s long-term healthy development, including revising fundamental market rules, bringing in long-term investments, prompting the reform of State-owned enterprises and the growth of private companies, and accelerating financial opening-up.
Dong Dengxin, director of the Finance and Securities Institute, which is part of the Wuhan University of Science and Technology, said the announcements of the proposed measures has helped shore up investor sentiment.
“When the proposed measures are implemented, they would stabilize not only the stock market but the real economy, especially by overcoming the funding shortage faced by private companies and consolidating expectation of a neutral monetary environment,” he said.
In concert with the announcements on Oct 19, a statement released on the next day after a meeting held by the financial stability and development committee under the State Council, the cabinet, described the capital market as a “pivot” that could stabilize the economy for the first time.
The description resonated with Hong Rong, founder of investor education platform Hongda Education who also doubles up as an MBA tutor at the Shanghai Advanced Institute of Finance. Hong said the description, in tandem with the proposed measures, showed regulators’ clearer stance on safeguarding the market’s healthy development, constituting a major boost to investor sentiment.
The recent weeks have seen a speedy implementation of the promised measures, especially those assuaging the pledged-share risks. For instance, the Shenzhen Stock Exchange has issued special bonds of 1 billion yuan ($144 million). Securities firms have also established and injected 22.8 billion yuan into 11 risk-easing asset management plans.
With some of the measures announced on Oct 19 having taken effect already, analysts said the issue of pledged shares appears to be under control. But they hastened to add the investor sentiment may still be rather fragile in the short term.
They also called for more measures to aid the A-share market’s healthy development, especially in terms of introducing more long-term investments.
Hong urged help for Chinese securities firms in the form of tax breaks, low-interest loans, and the right to manage clients’ security deposits. Such measures would help the market intermediaries, who play a key role in the front line of bringing in investors’ long-term capital, to thrive, he said.
Dong from the Wuhan university called for encouraging retail investors to build retirement savings by investing in long-term wealth management products, thus helping squeeze out short-term speculative investments that tend to make the A-share market volatile.