A man stands in front of an electronic board displaying share prices at a securities exchange house in Shanghai, China, (Photographer: Qilai Shen/Bloomberg)

China Urges Investor Calm While Stopping Short of Market Rescue

(Bloomberg) -- China’s top financial officials moved to shore up confidence in the country’s tumbling stock market, marshaling a rare show of coordinated verbal support as the government tries to prevent a $3 trillion equity rout from infecting the world’s second-largest economy.

The reassuring words from leaders of China’s central bank, securities watchdog, and banking and insurance regulator -- including promises of financial support for local businesses -- followed a bout of investor panic this week that sent the Shanghai Composite Index to a four-year low. The comments came just hours before Chinese data showed a deeper-than-estimated economic slowdown, and a day after Donald Trump took new steps to escalate his trade war with Beijing.

While the Shanghai Composite opened lower and meandered for much of Friday morning, it rallied in the afternoon and closed with a 2.6 percent gain. Some investors speculated that China’s “National Team” of state-backed funds stepped in to add some oomph to policy makers’ reassurances.

“It looks like the state is starting to intervene and the three sages from different parts of the government have come out at the same time to boost confidence,” said Hou Anyang, a fund manager at Frontsea Asset Management in Shenzhen.

China’s stock market has tumbled at the fastest pace worldwide this year as trade tensions, weakening economic growth and a wave of forced selling rattled investors. Losses accelerated this month as traders zeroed in on the risks associated with $600 billion of Chinese shares that have been pledged as collateral for loans.

The rout has left China’s ruling Communist Party with few good choices. If authorities intervene to bail out investors like they did in 2015, it might stop the short-term bleeding but would undermine efforts to reduce moral hazard and deleverage an economy saddled with record levels of debt. Doing nothing could jeopardize financial stability and weaken Beijing’s hand as it tries to end trade tensions with Washington.

So far Xi Jinping’s government appears to be taking a middle road, voicing support for the market while stopping short of large-scale intervention. Some investors worry the strategy may not be enough to restore investor confidence.

“While this may be a cure for wounded investors, the market will likely remain stuck in a downward spiral if implementation of strong policies doesn’t follow,” said Shen Zhengyang, a Shanghai-based strategist at Northeast Securities Co.

Read more: China Measures to Support Markets Are Insufficient, Analysts Say

People’s Bank of China Governor Yi Gang said in a statement on the central bank’s website that it is studying measures to ease companies’ financing difficulties and will use policy tools to support banks’ credit expansion.

Liu Shiyu, head of the China Securities Regulatory Commission, said his agency encouraged local government-backed funds to help ease pressures created by share-pledge risks. Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, said in an interview posted on the regulator’s website that recent “abnormal fluctuations” in markets don’t reflect the country’s economic fundamentals and “stable financial system.”

Liu He, China’s vice premier, hammered home the message in an interview with the Xinhua News Agency. He urged officials to step up efforts to promote “healthy” stock-market development while noting that equity valuations had dropped to historically cheap levels.

Here’s What Top Regulators Said on Friday

Yi GangChina will support financing to non-state-backed firms
China’s macro leverage ratio has stabilized and its growth potential is extremely strong
Guo ShuqingRecent abnormal fluctuations in China’s financial market does not reflect the country’s economic fundamentals
Allow insurance companies to launch products designed to ease share-pledge risks
Liu ShiyuEncourage funds backed by local governments to help ease pressure on listed companies from share-pledge risks
Explore measures to help private firms issue bonds

Before Friday’s rally, the Shanghai Composite index was trading at the lowest price-to-book ratio on record relative to the MSCI All-Country World Index. While some investors have cited cheap valuations as a reason to buy, others argue it will take bolder government action to fuel a sustained rally.

“The regulators don’t want to encourage expectations that the National Team will always save the day,” said Nie Wen, an economist at Huabao Trust. “But from the circumstances now, that may be the only remedy.”

To contact Bloomberg News staff for this story: Lucille Liu in Hong Kong at xliu621@bloomberg.net;April Ma in Beijing at ama112@bloomberg.net

©2018 Bloomberg L.P.

With assistance from Editorial Board