Chinese stocks pared most of their early gains on Monday, showing once again that Beijing’s efforts to boost markets are falling flat in the face of economic worries.
After opening 5.5% higher on a slew of market support measures announced over the weekend, the CSI 300 Index of mainland stocks pared its advance to close just 1.2% higher. Foreign funds accelerated their selling through the day, poised to take this month’s outflows to the biggest on record.
Traders had been expecting more forceful steps after recent efforts by authorities failed to arrest the market’s slide. Measures announced Sunday included a reduction in the levy charged on stock trades, restrictions on share sales by top stakeholders at some firms, and lower deposit ratios for margin financing. The China Securities Regulatory Commission also said it will slow the pace of IPOs.
Monday’s price action suggests that foreign investors need to see concrete steps aimed at reviving the economy before returning to China’s equity market, one of the world’s worst performers in August. While Beijing has been taking steps to lift market sentiment, the country’s economic slowdown is due to structural and entrenched problems that are proving harder to fix.
“The open today was a bit too strong, and that level of hype understandably leads to some people walking away from the table,” said Lin Menghan, a fund manager at Shanghai Xiejie Asset Management Co. “The measures overall addressed the issues of outflow and dilution of funds in the market, rather than where the fresh liquidity will come from.”
Data Sunday showed the decline in China’s industrial profits persisted in July, the latest reading to confirm the dire state of the economy that has lapsed into a deflation.
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Global funds sold the equivalent of US$1.1 billion of mainland shares on a net basis via trading links with Hong Kong, according to data compiled by Bloomberg.
Stamp Duty
China last cut the stamp duty in April 2008, reducing it to 0.1% to support the market after a plunge, triggering a 9.3% rally in the Shanghai Composite in the following session and spurring a bull run into the next year. The gauge closed 1.1% higher on Monday. In May 2007, authorities had raised the rate to 0.3% to cool a rally that was drawing more than 300,000 new investors a day.
The CSRC’s restriction on share sales by major stakeholders applies to firms whose stock prices have fallen below IPO levels or net asset levels, or those that have not given out enough dividends. Less than half of the onshore firms are trading above both book value and IPO price, according to data compiled by Bloomberg.
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The raft of changes this time are expected to bring the equivalent of 750 billion yuan (US$103 billion) of new funds into the market per year, according to estimates from Huatai Securities. “New restrictions on share sales in effect keep around 250 billion yuan of funds from selling, and bring the strongest benefit to liquidity” among the measures, analysts including Wang Yi wrote in a note.
Meanwhile, some property stocks jumped by daily limits as the regulator said the embattled sector is exempt from new restrictions on refinancing.
China’s stock slump has likely reached a level that policymakers can no longer turn a blind eye to. As households suffer from a shrinking wealth effect from the property crisis, invigorating capital markets has become even more crucial.
Authorities earlier this month urged pension funds, large banks and other big domestic financial institutions to increase stock investments to support the market. Regulators have also cut handling fees on stock transactions, prodded mutual fund managers to increase purchases of their own equity funds and encouraged companies to do more share buybacks. CSRC has reportedly approved 17 exchange-traded fund products and 20 mutual funds recently in a bid to support markets.
‘Bazooka’ Needed
Still, foreign investors have been fleeing in droves, and the market’s response to stimulus measures has become increasingly muted in recent weeks. On Friday, the unveiling of property stimulus measures sparked an initial flurry of buying, with China’s benchmark CSI 300 Index reversing losses. However, the gauge resumed declines after about 10 minutes and ended the day down 0.4%.
The Hang Seng China Enterprises Index advanced 1.2%, trimming its earlier 4.1% jump. While the gains have helped pare its losses for August to under 10%, the gauge of Chinese shares listed in Hong Kong is still one of the world’s worst performers among more than 90 equity gauges tracked by Bloomberg.
The stamp duty cut “shows the urgency for policymakers to turn around market sentiment, but last time this was followed by massive stimulus, which may not be the case this time around,” said Marvin Chen, an analyst for Bloomberg Intelligence. “The key for a sustained re-rating is still turning around economic growth momentum, and more policy support will be needed.”
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China’s 10-year government bond yield gained two basis points on Monday, after earlier rising five basis points on bets some investors will likely switch to equities from bonds. The offshore yuan advanced as much as 0.3% before swinging to a decline.
The PBOC set its daily reference rate for the yuan at its strongest since mid-August, continuing a trend of more robust-than-expected fixings for the managed currency. It also injected the most amount of short-term cash to the financial system since February, a measure likely aimed at managing month-end liquidity needs.
“We expect a rally this week, maybe to a less degree than those after China lowered stamp duty in 2008,” said Neo Wang, Evercore ISI’s New York-based managing director for China Research. Wang added that a turnaround in the A-share market would not happen unless Beijing adopts more “bazooka” measures, such as the 4 trillion yuan stimulus package it rolled out in 2008.
