Government support fuels Shanghai stock surge; top forecaster believes year’s biggest bounce underway

China’s Shanghai and Shenzhen stock exchanges pledged more measures to revive confidence on the world’s worst-performing equity market this year, echoing the support from senior officials and financial regulators to defuse the share-pledge risk and aid the private sector.

The Shanghai bourse will explore the unveiling of new funds to bail out companies that pledge their shares as collateral for loans, and the smaller Shenzhen exchange said it will closely work with local governments and financial institutions to help the companies, according to two separate statements put out on the exchanges’ websites on Sunday.  

Meanwhile, the China Securities Regulatory Commission said a day earlier that it will shorten the period before some companies can seek back-door listings, softening the rules on reverse mergers.

Top-ranked Haitong Securities predicts the Shanghai Composite Index may rebound more than 10 per cent in what could be the year’s biggest bounce-back as government policies put a floor for the market.

The announcements by the two exchanges came after Vice-Premier Liu He, President Xi Jinping’s close economic aide, made a rare comment on China’s stock market on Friday, saying the declines offers good buying opportunities because of low valuations and China’s growth prospects.

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Hours before Liu’s comment, the central bank and regulators overseeing the financial sectors and the stock market said they will provide aid to listed companies, particularly smaller ones, which are bogged down in a liquidity squeeze because of exposure to share-pledge risks.

Share pledges, in which major shareholders of listed companies use their stock as collateral for loans from banks or brokerage, are blamed for the recent accelerated decline in stocks. The pledged shares are facing forced sales, as bearish sentiment on the broader market drags down the share prices to levels that will trigger margin calls. Shares worth 4.5 trillion yuan (US$649.1 billion) are pledged, or about 10 per cent of the total market cap of Chinese stocks, according to Essence Securities.

Traders ramped up buying on Monday, betting that the worst of the market downturn is over. The Shanghai Composite Index surged 4.1 per cent to 2,654.88, extending a 2.6 per cent rebound on Friday. It tumbled to a four-year low last week, sending the gauge plunging by as much as 25 per cent in 2018.

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The benchmark of stocks on the Shenzhen exchange, predominantly small-caps, closed 4.9 per cent higher, after the securities regulator said over the weekend that companies who failed in their bids for an initial public offerings can conduct back-door listings within six months of their rejection. Before the rule change companies needed to wait three years.

Smaller companies are typically targeted by those seeking to gain listing status through reverse mergers.“It is not a method to immediately drive the market up, but it is a message to investors that the regulator is still encouraging the listing of good assets,” said Zhou Ling, a fund manager with Shanghai Shiva Investment.

“In the coming weeks, the regulator will roll out more policy changes related to asset restructuring and fund inflows to impress investors that officials are doing their utmost to stabilise the market.”

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The Shanghai exchange will also help listed companies cut outdated capacity and inject more businesses that are backed by high technology through mergers and acquisitions, and encourage small companies to sell high-yielding or private bonds to alleviate their cash crunch, according to the statement.

Both the Shanghai and Shenzhen bourses said they will encourage more dividend payouts, share buy-backs and mergers and acquisitions among listed companies as measures to shore up the market.

The Shanghai Composite may rise at least 10 per cent from Friday’s level as policymakers unleashed a slew of positive policies and valuations are close to record lows, said Xun Yugen, a strategist at Haitong Securities in Shanghai, who was ranked No 1 for equity research by New Fortune magazine last year. The biggest rebound so far this year occurred in January with a 6.5 per cent gain, he said.

The index has already risen 6.8 per cent since Friday.