Portfolio | China market rout predictable, say analysts, see more pain ahead
The collapse in China’s A-share market was predictable, the government’s responses are unlikely to prevent further losses and a financial crisis is not out of the question, analysts say.
The central government has urged people to buy stocks since late last year, creating a bull market which it believed would help achieve financial liberalisation, debt deleveraging and state-owned enterprise reforms, according to reports issued by Bank of America Merrill Lynch and AXA Investment Managers.
Investors bought in enthusiastically, but the dream was rudely interrupted when the markets began to tumble. Since June 12, the Shanghai and Shenzhen composite indices have plummeted around 30 per cent and 40 per cent respectively.
Policymakers are very concerned about the selloff and are determined to stabilise market conditions
“The rollercoaster ride of the A-share market has much to do with the dramatic expansion and the subsequent unwind of equity market leverage,” said Aidan Yao, senior emerging market economist at AXA.
According to AXA, leverage amounted to 3.3 trillion yuan (HK$4.1 trillion), including 2.5 trillion in on-exchange margin financing and return-swap products and 800 billion yuan in off-exchange borrowing from financial institutions.
Bank of America Merrill Lynch said Beijing did not foresee the crash because it did not realise the full extent of shadow margin financing.
Since the crash, the government has announced measure after measure to halt the free fall, beginning with interest rate cuts, postponement of initial public offerings and suspension of new listings. It then declared 21 major brokerages would invest 120 billion yuan in blue chips and index exchange-traded funds, while 25 mutual funds would buy and hold futures.
“The continued flow of market support measures over the past three weeks … suggests the policymakers are very concerned about the selloff and are determined to stabilise market conditions,” Yao said.