A sharp fall in the mainland's key stock market indicator yesterday has prompted domestic investors to go back to basics - expecting Beijing to step in and clean up the mess.
The Shanghai Composite Index fell 99.61 points, or 3.79 per cent, to 2,526.82, hitting its lowest close since July 19 of last year.
It was the largest single-day drop in nine months, part of a global equity rout amid Standard & Poor's downgrading of US long-term credit.
'Investors feel helpless as the market is battered by internal and external problems,' said Dai Ming, an analyst with Kingsun Investment Management. 'They will have to pin their hopes on the government to recover their losses, but it seems unlikely that Beijing can do anything concrete.'
Last year, mainland investors were left to lick their wounds after the benchmark lost 14.3 per cent, falling victim to a flood of initial public offerings, despite gross domestic product growing at the fastest rate of the world's major economies.
Monetary tightening took its toll on the weak stock market this year but the China Securities Regulatory Commission remained adamant in approving more IPOs, funnelling money into cash-hungry companies.
As markets adjusted to Standard & Poor's move, mainland investors were likely reminded of 2008, when the key gauge dived a record 65.4 per cent over fears about the global financial meltdown.
'The impact from the overseas markets and the worries about global economies turned out to be much more severe than expected,' said Shenyin Wanguo Securities analyst Wei Daoke. 'The downfall [today] stoked fears among investors that the sharp fall of 2008 could be repeated.'
About 70 per cent of China's US$3.2 trillion in foreign reserves are invested in US dollar assets, and the country had US$1.16 trillion worth of Treasuries at the end of May.
In late 2008, Beijing launched a stimulus package, pumping trillions of yuan into constructing infrastructure projects as it strove to combat the global slowdown.
The efforts initially paid off, with the Shanghai index rising 80 per cent in 2009.
'Investors are expecting the government to help again,' Dazhong Insurance fund manager Wu Kan said. 'After all, the market has always been driven by government directives.'
Since November last year, the index has slumped nearly 20 per cent, but many investors and analysts are predicting a rebound by the end of the year.
The central government has in the past rolled out incentives to shore up a weak market and bolster investor confidence, either by suspending new share offerings or directing additional inflows of funds.
According to an official at the securities commission, the regulator decided last year to remain on the sidelines, letting market forces move the index. The thinking was mainland investors had grown more savvy after years of roller-coaster rides.
But some investors are not convinced and expect the commission to intervene again.
It is a waiting game, one punter says. 'I don't believe the government is willing to allow the market to go into a death spiral, at the expense of millions of investors,' said Zhang Wei, a retail investor who has been trading shares for more than 10 years. 'It is a mental game. As long as we are patient enough, bolstering measures will arrive and rescue the market.'
However, some analysts said it was unlikely the regulator could devise incentives strong enough to substantially lift the market.
'The only thing the regulator could do is slow down approvals of IPOs,' said one analyst. 'But this is in a context where the economic outlook remains unclear.'
The central government releases data today on the consumer price index for July. Analysts estimate the index, a key gauge for inflation, will have risen by more than 6 per cent.
Shenyin Wanguo Securities is putting the figure at 6.7 per cent for last month, topping June's three-year high of 6.4 per cent. Relatively high inflation will make it difficult for Beijing to loosen monetary policies any time soon.
State-owned newspapers such as Shanghai Securities News reported recently that the central government was studying whether to launch a 401k-style retirement saving scheme, encouraging pension and insurance funds to invest more in the capital market.
But it would be a long time before the programme materialises, analysts said.