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 Shanghai's benchmark share index crashed below 4,000 points for the
first time since April - a key support level that analysts said had
been seen as a line in the sand that Beijing had to defend, below
which more conservative investors would start ejecting from their
leveraged positions, widening the rout.
Chinese markets, which had risen as much as 110 percent from
November to a peak in June, have collapsed at an incredibly rapid
pace in since June 12, losing more than 20 percent in jaw-dropping
volatility as money surges in and out of the market.
That drop has wiped out nearly $3 trillion in market capitalization,
more than the GDP of Brazil.
In the latest move to arrest the slide, China's securities regulator
late on Wednesday relaxed rules on using borrowed money to speculate
on stock markets, letting brokerages set their own tolerance level
on margin calls and allowing the roll-over of margin lending
contracts.
"I think this is the right dose of medicine," said Hong Hao, chief
strategist with BOCOM International. "The recent slump was largely
driven by margin calls, so if brokerages don't force liquidation ...
the market slide should be stemmed, at least for now."
But there was no immediate relief, with the CSI300 index of the
largest listed companies in Shanghai and Shenzhen dropping 3.4
percent, while the Shanghai Composite Index lost 3.5 percent, to
3,912.77 points.
POLICY TOOLS
Beijing has been struggling since the weekend to find a policy
formula that would restore confidence, such as easing monetary
policy, suggesting more pension funds would invest in stocks and
other administrative tweaks, including the latest relaxations of
restrictions on margin trading.
But the resistance of China's army of retail investors - who still
dominate Chinese markets - to Beijing's blandishments makes it
difficult to forecast when the market might find a bottom, as
policymakers are running out of good options.
"The government has more tools it could use to support equities, but
these moves could be short-lived if investors remain negative,"
wrote Oliver Barron of NSBO in a research note, mentioning rumors of
IPO suspensions or outright buying of stocks by state-owned
vehicles.
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He also suggested higher level officials might have to make comments
of support.
"Retail investors account for about 85 percent of turnover, and the
recent correction has greatly endangered their belief in the capital
market opening-up and reform, and might even cause social unrest."
The presence of leverage in the market is a wild card factor that
has made it difficult to convince investors to wait out recent
fluctuations.
Both retail investors and many corporates appear to have borrowed
heavily to reap quick stock market gains, and they are now seeking
to reduce their exposure to further declines.
Postings on Chinese financial microblogs underlined the souring mood
among the retail investors who drive the market.
"The credibility of the government is in danger!" wrote one poster,
signing themselves ChuHan De Yi Tian.
"The weak macro environment and the high stock bubble makes the
interest rate cut meaningless!" wrote another, using the name Beiji
Tu Tu Tu. "I am done with the stock market."
(Editing by Alex Richardson)
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