(Bloomberg) — Chinese authorities are considering a package of measures to stabilize the slumping stock market, according to people familiar with the matter, after previous attempts to restore investor confidence failed, prompting Prime Minister Li Qiang to call for “strong” steps.
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Policymakers are trying to mobilize about 2 trillion yuan ($278 billion) mostly from offshore accounts of Chinese state-owned companies as part of a stabilization fund to buy stocks onshore through the Hong Kong stock exchange link, the people said, asking not to be identified when discussing a private matter. They also provided at least 300 billion yuan in local funds to invest through China Securities Finance Corp. or Central Huijin Investment Ltd. to invest in onshore stocks, the people said.
The deliberations underscore Chinese authorities' increased urgency to stem a selloff that sent the benchmark CSI 300 index falling to a five-year low this week. Reassuring the country's retail investors, many of whom have suffered from the ongoing real estate downturn, is also seen as key to maintaining social stability.
The creation of a government-backed stabilization fund has been under consideration since at least October, although some investors have expressed doubts about its effectiveness as Beijing's previous rescue efforts have not always worked. China's housing crisis, depressed consumer sentiment, falling foreign investment and weakened local business confidence after years of volatile policymaking are putting pressure on both the economy and markets.
“The potential support package should be able to contain declines in the short term and stabilize markets through the Lunar New Year, but government purchases alone have historically had limited success in reversing market sentiment unless followed by further action,” said Marvin Chen, a strategist at Bloomberg Intelligence.
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Onshore Chinese stocks pared their earlier rally, closing just 0.4% higher. A gauge of Hong Kong-listed Chinese stocks rose 2.8% after gaining 4.1% intraday.
Officials are also weighing other options and could announce some as early as this week if approved by senior leadership, the people said. Plans can still change. The China Securities Regulatory Commission did not respond to a request for comment.
At a State Council meeting on Monday chaired by Li, China's Cabinet received a briefing on the functioning of capital markets and considerations for related work, an official statement said, but did not provide further details on Beijing's plans .
In total, more than $6 trillion has been wiped from the market value of Chinese and Hong Kong stocks since the 2021 peak, underscoring the challenge Beijing faces as it tries to halt the decline in investor confidence.
Millions of investors – retirees, security guards, high school students – dominate China's stock markets, conducting about 80 percent of all trades. REUTERS/Aly Song (REUTERS/Reuters)
Separately, regulators on Monday issued so-called “window guidance” to at least two state insurance companies to prevent them from selling more shares than they bought. The country's largest brokerage firm, Citic Securities Co., suspended short-selling services for some clients last week following guidance from regulators, Bloomberg News reported.
China's selective moves in recent months to boost market sentiment have been met with widespread despair among traders, with some calling for more forceful stimulus measures. Beijing has restricted short selling and sovereign funds have stepped in to buy shares in major banks.
“A rescue package alone may not be enough to support the market in terms of value creation, but will certainly help dispel the notion that the government doesn't care,” said Vey-Sern Ling, managing director at Union Bancaire Privee .
Confidence has also been weakened in recent years by President Xi Jinping's increasing control over private companies, which has included a crackdown on the country's tech giants. International banks that had planned massive expansion in the country are now scaling back their ambitions to build platforms in the world's second-largest economy.
Kevin Sneader, president of Asia-Pacific (excluding Japan) at Goldman Sachs Group Inc., called for more action from authorities to restore confidence.
“When you look at this package or other measures, the question is: How will this be dealt with?” he said in an interview on Bloomberg Television in Hong Kong on Tuesday. “Does it change the mood? “Does it give people reason to believe positively in the future of the economy?” he said.
During the 2015 bankruptcy, Beijing used China Securities Finance Corp. as its main stabilization tool by allowing it access to up to 3 trillion yuan in borrowed funds from sources such as the central bank and commercial lenders. The money was used to purchase stocks directly and provide liquidity to brokerage firms. Nevertheless, the turmoil did not end until a year later.
This time, officials are trying to use offshore funds to minimize the impact on an already weakening yuan, the people said. Bloomberg Intelligence estimated that the rescue fund could continue to grow to $488 billion, assuming the size will be similar to 2015, when the “national team” staked about 5% of the market value of A shares, analysts led by wrote Sharnie Wong in a note.
The equity crisis is increasing pressure on so-called snowball derivatives, which are structured products that promise bond-like coupons as long as the underlying assets trade within a certain range. The CSI Smallcap 500 Index, a price benchmark for some of these products, slipped 4.7% on Monday, falling below an earlier estimated threshold that could snowball into widespread losses.
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