Author: Eamonn Sheridan

Officials from China's State Council (the Chinese government cabinet), the People’s Bank of China, the China Securities Regulatory Commission and other financial agencies met on Saturday, says the Wall Street Journal.

  • The Journal quotes "according to people with knowledge of the matter"
  • New stock sales (IPOs) have been suspended
  • And a 'market stabilization' fund has been set up

It had been estimated there are around 4tln yuan of planned new initial public offerings

Its hoped that stopping these will mean liquidity will flow into existing stocks, thereby stabilizing the stock markets

Senior officials also discussed the setup of a market-stabilization fund, the people close to the matter said

  • The Securities Association of China issued a statement on Saturday afternoon saying 21 Chinese brokerages will invest the equivalent of 15% of their net assets (as of the end of June) in the fund
  • That's around 120 billion yuan   ................   (Drop, meet bucket)

Journal article is here, gated: China to Suspend New Stock Sales to Preserve Liquidity

Reuters has followed up with more, also:

  • Separately on Saturday, 25 Chinese mutual funds announced they too would put their own capital into stocks.

Added - more via Reuters:

 The firms also would seek to speed up the application and issuance of equity funds, the Asset Management Association of China said in a statement on their website after a meeting in Beijing.

-

This is the Shanghai Composite, showing the recent drops:


In a nutshell:

  • It had a very, very, very rapid upmove
  • Fuelled with lots of leverage, margin financing
  • And euphoria
  • 80+ odd % of trading is 'retail punters', many are new to trading
  • hedging through forms of short selling isn't widely done ... and many wouldn't know how anyway

Lately ...

  • There have been lots of new IPOs - i.e. new supply hitting the market ... and also the history of these is one of surges on the first day or more ... attracts new money that may well have come from existing shares
  • Once the plummet started, margin calls and fear took over

-

The WSJ and Reuters reports are basically 'throw more government' at the market. The falls have already been large, so they may have some success, and the suspension of IPOs will, theoretically, free up capital for existing shares. I wonder how successful the IPOs would have been in this environment anyway. Will money earmarked for IPOs finds its way back into existing stocks? There is plenty of fear out there, so this may be a drawn out process. Market bottoms often are. It takes time for markets to run their course, regardless (in spite of?) of how much government you throw at them.


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