China stock market

China economic tsar steps in to steady ship after slowest quarter in decade, says stocks have ‘high investment value’

Liu He joins financial and regulatory institutions in underlining economy’s resilience

PUBLISHED : Friday, 19 October, 2018, 2:16pm
UPDATED : Friday, 19 October, 2018, 11:05pm

Liu He, China’s financial tsar, led a coordinated effort with the country’s central bank and financial regulators on Friday to stem its worst stock market rout in three years, and extended a lifeline to businesses battered by a liquidity squeeze.

Chinese regulators have already sought measures to defuse risks related to shares used as collateral for loans, while the recent declines in the country’s stock market have created a good buying opportunity, the vice-premier said in an interview to the Communist Party’s mouthpiece, People’s Daily.

“In terms of global asset allocation, China’s stock market already has a pretty high investment value, with bubbles significantly contracting, the quality of listed companies improving and valuations at a historical low level,” said Liu. “I believe that investors will make a rational judgment.”

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The coordinated effort had an immediate effect on the stock market – the benchmark Shanghai Composite Index rose by as much as 2.7 per cent on Friday, even as the economy posted its slowest quarterly growth in 10 years.

Earlier on Friday, the People’s Bank of China (PBOC), as well as the China Banking and Insurance Regulatory Commission (CBIRC) and the China Securities Regulatory Commission (CSRC) said they will ramp up support for private companies exposed to a liquidity squeeze caused by shares used as collateral for loans through easier lending.

Support from China’s top leadership comes after the Shanghai Composite Index fell to a four-year low this week, with sell-offs accelerating on mounting concerns that pledged shares will face forced sales and, thus, exacerbate declines. Shares worth 4.5 trillion yuan (US$648.6 billion) in market value have been used as collateral for loans – a way of accessing funds used particularly by smaller listed companies – according to Essence Securities data.

I believe that investors will make a rational judgment
Vice-Premier Liu He

This roughly equates to 13 per cent of the combined market capitalisation of stocks on the Shanghai and Shenzhen exchanges. Unless loans are repaid or more collateral is added, the stocks can be liquidated by debtors, further weighing on already weak sentiment.

Six companies, including property developer Shenzhen Quanxinhao and Guangdong Silver Age Sci & Tech, have already been forced to sell their shares this month.

Yi Gang, governor of the central bank, said on Friday morning the PBOC will push for more debt and equity sales in the private sector to ease the funding crunch. He also said the central bank will use various monetary tools, such as relending and medium-term lending facilities, to allow commercial lenders to advance more loans to private companies.

“The recent volatility in the stock market is mainly affected by investors’ expectations and sentiment,” said Yi. “In fact, China has good economic fundamentals, has made progress in preventing financial risks and has macro leverage ratio stability. On the whole, stock valuations are already at a historical low relatively – and that stands in contrast with China’s improving economic fundamentals.” He also said the central bank would stick to its neutral monetary policy.

Less than an hour before the central bank governor’s statement, the CBIRC as well as the CSRC said separately they would allow financial institutions such as insurers, brokerages and private equity firms to aid listed companies facing a liquidity squeeze.

The market has responded well to these statements – the Shanghai Composite Index rebounded by 2.6 per cent to 2,550.47 at the close on Friday, paring its losses this year to 23 per cent. The Shenzhen Composite Index of predominantly small caps that have been hit by the liquidity crunch, also added 2.6 per cent, but is still heading for an annual decline of 33 per cent.

The CBIRC said it will allow insurers to issue special products to fund listed companies affected by the liquidity crunch, and these products will be beyond the ceiling limit on insurers’ equity investment. It also said creditors should undertake a comprehensive assessment of their debtors’ growth prospects before making decisions.

The local governments in Shenzhen and Beijing are also actively bailing out embattled companies in their jurisdictions. They have set aside tens of billions of yuan to aid listed companies through either lending or equity investments. More local authorities in the southern province of Guangdong may follow suit after the conclusion of studies, according to China Securities Journal.