China shares plunge more than 6pc to end at 13-month low, amid few signs of ‘national team’ support for markets

BlackRock says risk of forced selling in days ahead is limited as leveraged hands have been forced out of the market

PUBLISHED : Tuesday, 26 January, 2016, 7:20pm
UPDATED : Tuesday, 26 January, 2016, 7:29pm

China’s equity markets will be “normalised” with fewer government interventions this year, as the financial system has been cleansed of excessive leverage, analysts say.

China’s benchmark Shanghai Composite Index plunged by 6.42 per cent to a 13-month low at 2,749.79 on Tuesday, while government intervention to support the market, sometimes referred to as the national team, was out of the action, rather than on a shopping spree to prop the markets up.

Helen Zhu, head of China equities at BlackRock, the world’s biggest asset manager, said the current leverage rate on China’s equity markets had been brought down after last summer’s stock rout.

“The risks from excessive leverage have been digested by now. Thus we will see the A-share market back to ‘normalised’, with fewer ‘national team’ intervention. As we can see, authorities have restarted the initial public offering market, and they are set to kick off the Hong Kong – Shenzhen stock connect programme within this year,” she said.

The outstanding balance of brokerage-based margin financing dropped to 975.26 billion yuan (HK$1.15 trillion) by Monday, from the peak of 2.3 trillion yuan in June.

Meanwhile, the unregulated shadow margin financing business, including the once hot umbrella trust that enables ten fold leverage, have been cleared by the authority.

Last week, Fang Xinghai, the vice chairman of China Securities Regulatory Commission, said regulators planned to reduce intervention in the market, while letting it float “more freely”, during an address to the World Economic Forum’s Annual Meeting in Davos, Switzerland.

Hong Hao, chief strategist with Bocom International, said “hopefully”, the government has made up its mind to stay away from the market, as long as the latter is “capable of discovering fair value”.

The central bank has injected ample liquidity into the market through its policy tools and open market operations in recent weeks. So there is no shortage of capital, the market is capable of repositioning itself, he said.

The leverage fuelled bull run lifted the Shanghai Composite to a seven-year high at 5,166.35 in mid June. But its plunge by 30 per cent in the last three weeks has triggered automatic selling by creditors, triggering tighter credit conditions for corporates and banks.

Chinese regulators allowed hundreds of companies to suspend trading, and channelled 1.5 trillion yuan (calculated by Goldman Sachs) as into supporting the market, as the China Securities Finance Corporation aggressively bought shares.

Authorities has been clamping down on leveraged share purchases ever since.

As for the outlook, Zhu with BlackRock said she believed there are opportunities in growth sectors, although she expects equity markets to remain volatile.

“Some people argue that China’s central bank has run out of ammunition. But I do not think so,” she said, adding that China still has room to pump in more stimulus, including lowering funding costs and guiding the currency lower, while expanding fiscal spending and removing restriction on investment in the property sector.