China tries to prop up stocks, but market continues to head south

China's tumbling stock market showed signs of seizing up on Wednesday, as companies scrambled to escape the rout by having their shares suspended and indexes plunged after the securities regulator warned of “panic sentiment” gripping investors.

Beijing, which has struggled for more than a week to bend the market to its will, unveiled yet another battery of measures to arrest the selloff, and the People's Bank of China said it would step up support to brokerages enlisted to prop up shares.

With nearly half the market on a trading halt and another round of margin calls forcing leveraged investors to dump whatever shares could find a buyer, blue chips that had been supported by stabilization funds earlier in the week bore the brunt.

“I've never seen this kind of slump before. I don't think anyone has. Liquidity is totally depleted,“ said Du Changchun, an analyst at Northeast Securities.

“Originally, many wanted to hold blue chips. But since so many small caps are suspended from trading, the only way to reduce risk exposure is to sell blue chips.“

The CSI300 index CSI300 of the largest listed companies in Shanghai and Shenzhen closed down 6.8 percent, while the Shanghai Composite Index SSEC dropped 5.9 percent.

More than 30 percent has been knocked off the value of Chinese shares since mid-June, and for some global investors the fear that China's market turmoil will destabilize the real economy is now a bigger risk than the crisis in Greece.

“Also, the ripple effect from the market correction has yet to show up,” wrote Bank of America Merrill Lynch analysts in a note. “We expect slower growth, poorer corporate earnings, and a higher risk of a financial crisis.”

Commodities markets reflected growing concerns about the broader health of the world's second largest economy, with copper prices falling to a six-year low, Shanghai nickel futures sliding by their 5 percent daily limit, and oil falling toward $56 a barrel, near a three month-low.

More than 500 China-listed firms announced trading halts on the Shanghai and Shenzhen exchanges on Wednesday, taking total suspensions to about 1,300 — 45 percent of the market or roughly $2.4 trillion worth of stock — as companies scuttled to sit out the carnage.

The plunge in China's previously booming stock markets, which had more than doubled in the year to mid-June, is a major headache for President Xi Jinping and China's top leaders, who are already grappling with slowing growth.

Beijing's interventionist response has also raised questions about its ability to enact the market liberalization steps that are a centerpiece of its economic reform agenda.

China has orchestrated brokerages and fund managers to promise to buy billions of dollars worth of stocks, helped by a state-backed margin finance company which the central bank pledged on Wednesday to provide sufficient liquidity.

The securities regulator said the Securities Finance Corp had provided $41.8 billion to 21 brokerages, though that sum is only 40 percent of the amount of leveraged positions that investors have cut since June 18.

Unlike other major stock markets, which are dominated by professional money managers, retail investors account for around 85 percent of China trade, which exacerbates volatility.

“It's uncommon to see so many shares posting consecutive daily limit falls, and the index futures swinging so wildly,” said Wang Feng, CEO and founder of hedge fund firm Alpha Squared Capital Co and a former Wall Street trader.

“It's a stampede. And the problem of the market is that all the players move in the same direction, and are too emotional.”

Reuters