State-backed cheerleaders buoy China markets

Soothing words from state media appear to have had their desired effect on China’s markets, with the Shanghai and Shenzhen bourses on Tuesday partially recovering from last week’s hefty declines.

The Shanghai Composite finished Tuesday with a 2.2 per cent gain — its best day since June 1 — after sinking as much as 4.7 per cent in morning trading. The Shenzhen market added 1.2 per cent, having also dropped sharply earlier in the day.

The volatile session, which was the first day of trading after a long weekend, followed the worst week for Chinese stocks since 2008. On Friday alone, the total value of China-listed shares fell $540bn, more than the combined market capitalisation of the Russian stock market.

The 13.3 per cent decline in the Shanghai Composite last week spurred a flurry of front-page commentaries in China’s state-backed papers that encouraged the retail-dominated market not to panic.

“Volatility is a normal status of capital markets and all participants should be aware of this fact,” the official Securities Times wrote on Tuesday. “After a reasonable analysis of the current market environment, we find the bullish market logic has not changed yet.”

Some analysts warn that Beijing has been inflating a state-sanctioned stock market bubble, as looser monetary policy has tempted millions of savers to switch from cash to equities. Margin debt has surged, while trading volumes have jumped to record-breaking levels.

Last week’s sell-off fed into growing fears that a painful unwinding is imminent.

However, last week’s drop may also have been the result of a wave of share sales that has sucked liquidity from the market. So far this year, Chinese companies have raised $115bn from initial public offerings and share placements, according to Dealogic — more than double the amount during the same period last year.

Many believe the rally has further to run and that Beijing will step in should the market wobble show signs of turning into a rout.

“While there was no single catalyst, the loss of momentum was mostly a reaction to [a continuing] government crackdown in margin lending and an expected surge in IPO supply,” said analysts at BlackRock. “The takeaway for investors, however, is that liquidity and central bank actions will probably continue to drive Chinese stocks.”

Steven Sun, head of China equity research at HSBC, said last week’s correction could be “healthy” for the long run, as it could help to reduce speculative margin lending — a concern for regulators.

“We think it would be premature to call an end to this rally, given the importance of the stock market to helping China’s state-owned enterprises and key industries obtain much-needed financing, and the likelihood of more monetary easing.”

The Hang Seng China Enterprises index of Chinese companies listed in Hong Kong closed up 1.7 per cent on Tuesday.

Additional reporting by Peter Wells and Ma Nan