Chinese investors appear unconvinced by a government-led plan to throw a lifeline to the country’s struggling private sector and prop up the stock market, with falls in stock indices on Tuesday wiping out much of the gains made the previous day. Analysts also expressed scepticism about the government-led effort announced on Monday, arguing that more fundamental economic and financial reforms were needed in the midst of the trade war with the United States. Chinese stocks had risen sharply after supportive comments by regulators and top officials, including President Xi Jinping and Vice-Premier Liu He, on Friday and on the weekend, with investors banking on significant support from the government for private companies and the faltering market. The benchmark Shanghai Composite Index rose 2.6 per cent on Friday and a further 4.1 per cent on Monday. But the precise measures announced by regulators and an association representing state-owned financial firms on Monday night failed to meet expectations, resulting in a sharp drop in stock prices. The Shanghai Composite fell 2.6 per cent to 2,594.83 on Tuesday. Analysts said Chinese investors were sensitive to fresh liquidity injections, but so far, Beijing had tried to stay away from directly pumping money into the secondary market, as its campaign to cut excess debt from the economy was still only half finished. “The new measures mostly represent Beijing’s supportive attitude on the market. They are not introducing fresh liquidity into the market,” Zhou Hao, senior emerging market economist at Commerzbank, said. Xi urges China to become more self-reliant amid US trade war Zhou said Beijing was also trying to shy away from the direct measures to prop up the market that it used in 2015 to end that summer’s market rout, which spawned insider trading scandals by some state securities firms. “Moreover, the key to the recent sell-off is due to investors’ pessimism about the macroeconomic outlook. As long as this is not reversed, the market rebound won’t last,” Zhou said. Chinese officials sought to boost the confidence of struggling entrepreneurs and investors after the Shanghai Composite fell to a four-year low on Thursday and data released the next day showed that economic growth had decelerated to the lowest rate in nearly a decade. The authorities were forced to act because Chinese private companies and investors had pledged 4.5 trillion yuan (US$650 billion) in shares as collateral for loans – a method widely used by private companies to secure funds because they often do not qualify for regular bank loans. As the stock market fell, so did the value of the collateral, prompting banks to demand additional funds. Many analysts worried that forced sales of stock to meet these demands would create a vicious downward spiral in the stock market, threatening a systemic crisis throughout the Chinese financial system. JP Morgan chief gives upbeat assessment of China economy, despite trade war The amount of shares pledged as collateral for loans is large enough to threaten market stability, as it is equivalent to 5.4 per cent of China’s 2017 nominal GDP and about 12 per cent of the total market capitalisation of the main A-share market. “The current situation just reminds people of what happened during the 2015 stock rout,” said Kevin Leung, executive director of investment strategy at Haitong International Securities. “The drop in the index is not that sharp, but the market has fallen to a level that may trigger massive margin calls, threatening systemic stability.” On Monday night, the semi-official Securities Association of China (SAC) announced that its members would set up a new special fund, worth 100 billion yuan (US$12.8 billion), to be lent to private companies to ease the pressure on the shares they had pledged as collateral. But it is unclear what criteria would be used to pick the companies that would receive relief funds. The association did not immediately respond to queries from the South China Morning Post . Analysts said they were concerned that the size of the bailout fund was too small and its method of operation too vague to support the market for long, though it was clear the government wanted to draw a line under the market. Leung said “100 billion is far from enough to cover the stock pledge on the A-share market”, but added that the move, along with the comments by senior officials and measures announced by other regulators, was a strong signal that Beijing was telling investors that “this is the bottom”. The SAC fund would be collected from state-owned brokerage companies, banks, insurers, and other state companies, and would be earmarked to help listed companies “with good prospects” to ease the pressure on their pledged shares, the official announcement said. China’s technology hub has an all-electric bus fleet, funded by the state In addition to the SAC plan, Chinese government agencies announced plans to help private companies, which account for 60 per cent of growth and 80 per cent of urban employment. The People’s Bank of China said in a separate notice on Monday that it would boost its relending and rediscount quotas by 150 billion yuan. These are tools that allow the central bank to supply financial institutions with money to lend to smaller private enterprises. These increases are in addition to the 150 billion yuan boost announced in June. In a further effort to ease the pledged collateral problem, the China Banking and Insurance Regulatory Commission said on Friday that it had relaxed risk management rules on listed firms’ financing activities via stock pledging for mutual funds’ stock investment products. The China Securities Regulatory Commission also issued several revisions to rules regulating fundraising activities, including shortening the period for some companies to list by buying an existing listed company, a so-called reverse listing. The extended slide in the stock market has triggered concern that widespread margin calls could trigger a collapse in financial markets. China’s drive to become world’s most powerful electric car maker But some analysts remain upbeat about the market outlook. Xun Yugen, a strategist at Haitong Securities in Shanghai, said the Shanghai Composite might rise at least 10 per cent from Friday’s level on the back of the slew of positive policies and due to valuations being close to record lows.