The mainland's securities regulator is ratcheting up pressure on mutual funds to increase equity purchases after the key stock market indicator lost nearly 3 per cent this week.
The move was seen as the first substantial step by the newly appointed chief regulator, Xiao Gang, to support the beleaguered stock market since he took office five weeks ago.
The China Securities Regulatory Commission published a new guideline on mutual fund operations after the market closed yesterday, stipulating that stock-focused funds must spend at least 80 per cent of their assets to buy stocks, up from the current requirement of 60 per cent.
The rise could theoretically inject an additional 200 billion yuan (HK$251.8 billion) into the market. According to China Galaxy Securities, the stock-focused funds were valued at 1.15 trillion yuan at the end of last year.
The CSRC said it would solicit public opinion on the new rule until May 26. Normally, a new rule becomes effective after the end of the consultation period.
An analyst with West China Securities, Wei Wei, said: "Investors are taking a wait-and-see approach, hoping the regulator will move to rescue the market. The new rule could help restore confidence because it's a sign the new chairman cares about the market's performance."
Unlike his predecessor, Guo Shuqing, who would make public pronouncements about his policy directions, Xiao has been tight-lipped since he took the helm of the CSRC in late March.
The Shanghai Composite Index slid 0.97 per cent to 2,177.91 points yesterday. Overall, the index sank 2.97 per cent for the week, the largest weekly drop in two months.
Investors are still plagued by worries that the reopening of the initial public offering market would hit stock prices. Guo, who was appointed acting governor of Shandong, suspended new share offerings in October to stem fresh equity influx while bolstering the key index.
The market has been rife with speculation that Xiao would lift the temporary listing ban soon, although he has yet to make a statement on the issue.
The increase in minimum holdings by stock-focused funds came as a surprise to investors and analysts and is being seen as a sign of Xiao's determination to underpin the weak market.
Normally, mutual fund managers pare their share holdings in a bear market to cut losses while investing more in bonds and bank deposits.
The new rule, by forcing them to increase share holdings, is not in compliance with the market-based reforms proposed by the mainland leadership.
The CSRC chairman is tasked with maintaining stock market stability, as heavy losses by millions of retail investors would trigger social disorder.
Since Xiao, formerly the chairman of the Bank of China, became chairman of the CSRC, the Shanghai indicator has lost 4.4 per cent, prompting him to roll out incentives to boost the market, analysts said.
However, Wei Daoke, an analyst at Shenyin Wanguo Securities, said: "It will still take a while before the market turns bullish."