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Beijing pays high price for intervention

  • Author:naky
  • Source:www.diecastingpartsupplier.com
  • Release on:2015-09-16
Aggressive policy action is now a regular feature of global markets — Haruhiko Kuroda had his bazooka, while Ben Bernanke took to a helicopter.

But in China, falling asset prices have met a full-scale invasion of the market, securing an expensive victory that many believe could yet prove fleeting.

After three months of huge government intervention to halt diving stocks, Chinese authorities appear ready to declare their mission accomplished. Zhou Xiaochuan, governor of the People’s Bank of China, told a G20 meeting last weekend that the stock market correction, which has left the Shanghai Composite nearly 40 per cent below its June high, is now “mostly over”.

In the days since, the Shanghai Composite has barely budged, rising 1.2 per cent this week. Having tumbled from a peak of 5,100 points in mid-June, the index seems to have found a new comfort zone just above 3,000 points, where it has been trading since the last week of August.

Not everyone is convinced, however. Average equity valuations may have come down significantly from the peak, but many stocks — especially small-caps — still trade at price to earnings ratios far above their historical trend. Despite the huge falls in the Shanghai and Shenzhen indices, both have risen a third over the past 12 months, making them the best performing markets in the world. The bubble, say sceptics, has not yet completely burst.

“The government is supporting the market at too high a level”, says Francis Cheung, China equity strategist at CLSA. “They are going to lose. At some point, they will have to let go.” He has a price target for the Shanghai Composite of 2,700, implying a further 15 per cent drop from current levels.

The costs of rescuing the market have not just been financial. The intervention has derailed some key reform initiatives, such as shifting capital raising from commercial bank loans to the equity market. To cut the supply of new shares into the market, initial public offerings have been frozen.

Trading volumes have collapsed as government action, capital outflows and ructions in the currency markets have sapped liquidity. Turnover on the Shanghai stock exchange on Tuesday fell to $43bn, the lowest daily amount since February and down from a peak of $212bn in early June. Futures volumes have taken a more severe hammering.

Meanwhile, the longer term goal of increasing foreign participation in domestic financial markets has taken a significant step backwards after new rules were introduced that banned short selling and big share sales.

“Nobody wants to own an asset without knowing if they can sell,” says Bob Browne, chief investment officer at Northern Trust, the US fund manager with $960bn in assets under management.