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 Concerns about the level of borrowing to fund market positions have
been magnified by the grey market - a loosely regulated network of
state-owned commercial banks, trust companies, fund managers, and
grassroots finance firms.
If banks decide to rein in their exposure to the stock market, it
could squeeze a line of credit for potential buyers and so undermine
confidence in a price recovery.
The benchmark CSI300 index <.CSI300> of the largest listed companies
in Shanghai and Shenzhen closed down 2.9 percent, while the Shanghai
Composite Index <.SSEC> closed down 2.2 percent.
Still, the performances were relatively calm compared with Monday,
when stocks dropped more than 8 percent for their biggest one-day
drop since 2007. Analysts have struggled to identify a single clear
reason for the day's tumble.
Chinese authorities have scrambled to steady the rollercoaster stock
markets this year. Share prices more than doubled in the six months
to May, before crashing in June by more than a third.
Marshall Mays, director of Emerging Alpha Advisors, a fund
management company in Hong Kong, said he expected Beijing to adopt a
"whatever it takes" policy to underpin the stock markets. "The CCP
cannot allow prices to collapse," he said, referring to the
Communist Party.
POLITBURO VOWS ACTION
China's Politburo, a decision-making body of the Communist Party,
promised to step up targeted adjustments of economic policy to
foster stable growth in the world's second-largest economy, local
media said on Thursday - adding to a series of statements lately
that could point to more policy easing at any time.
In a rare acknowledgement of the growth challenges faced by China,
state radio quoted the Politburo as saying the country had yet to
find new drivers to power its economy at a time when old engines
were flagging.
To ensure the Chinese economy can sustain a "reasonable" pace of
growth, the Politburo reiterated the government's line that it would
keep economic policies broadly stable, while increasing targeted
adjustments.
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Citing unidentified bank officials, the China Securities Journal
said Chinese banks had been checking their exposure to the stock
market via wealth management products and loans collateralised with
shares.
Banks have been a major source of lending to the grey market for
stock investors but the pace of the stock market fall in June may
have put their money at risk, analysts said.
Monday's shock drop jolted markets, and traders said many investors
are now waiting on the sidelines to see if prices stabilize before
they will buy shares again. The exact reason for the fall remains a
mystery.
One explanation may come from money markets. Authorities had pumped
a net 85 billion yuan ($13.7 billion) into money markets at the end
of June, just as they were trying to stop a free-fall in share
prices.
Stocks stabilized, but then the central bank began cautiously
draining funds and short-term borrowing costs crept higher. On cue,
stocks tanked on Monday.
(Reporting by Donny Kwok in Hong Kong, Nathaniel Taplin and Pete
Sweeney in Shanghai; Writing by Neil Fullick; Editing by Rachel
Armstrong)
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