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 In an extraordinary weekend of policy moves, brokerages and fund
managers vowed to buy massive amounts of stocks, helped by China's
state-backed margin finance company, which in turn would be aided by
a direct line of liquidity from the central bank.
The CSI300 index <.CSI300> of the largest listed companies in
Shanghai and Shenzhen closed up 2.9 percent, while the Shanghai
Composite Index <.SSEC> gained 2.4 percent.
That represented a significant pullback, however, from an initial
burst of euphoria that pushed both indexes up around 8 percent when
trading began, raising questions about whether the rebound can be
sustained.
Oliver Barron, China policy research analyst at NSBO, said it wasn't
just faith in the markets at stake after investors had ignored
official measures to prop up equities as indexes slid around 12
percent last week.
"After the market continued to fall despite myriad support measures,
the government reached peak panic mode and must have worried that
investors would not only lose confidence in the markets, but in the
government itself," he said.
 The rapid decline of China's previously booming stock market, which
by the end of last week had fallen around 30 percent from a mid-June
peak, had become a major headache for President Xi Jinping and
China's top leaders, who were already struggling to avert a sharper
economic slowdown.
In response, China has orchestrated a halt to new share issues, with
dozens of firms scrapping their IPO plans in separate but similarly
worded statements over the weekend, in a tactic authorities have
used before to support markets.
Traders have also complained that some firms may be ducking out of
the market turmoil by seeking a trading suspension, as an unusually
large number of companies - about a quarter of all those listed in
Shanghai and Shenzhen - have filed for a halt.
Recent falls in commodity markets, which are sensitive to
expectations of Chinese demand, underline the broader fears among
global investors about the strength of the economy.
Shanghai copper <SCFcv1> posted its steepest daily drop in 5 months
on Monday, Chinese steel prices <SRBcv1> are at their lowest level
since the depths of the global financial crisis and iron ore
<.IO62-CNI=SI> has fallen 17 percent since mid-June. [COM/WRAP]
BANKS SURGE, SMALL CAPS SLUMP
Monday's stock market gains were focused on blue chips, the explicit
target of the stabilization fund, particularly the big banks, with
the likes of Bank of China <601988.SS>, Agricultural Bank of China
<601288.SS> and ICBC <601398.SS> all surging nearly 10 percent.
In contrast the ChiNext growth board <.CHINEXTC>, home to some of
China's giddiest small-cap valuations, fell 4.5 percent.
"Whether the blue chips will calm the small caps, or the small caps
will continue to unsettle the rest of the market remains to be
seen," wrote Hong Hao, chief strategist of BOCOM International.
Hong Kong shares fell <.HSI>, widening the valuation gap between the
domestic "A" and Hong Kong "H" listings of Chinese firms, with
foreigners net sellers through the Connect scheme that connects the
Hong Kong and Shanghai exchanges.
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China stocks had more than doubled over the past year, despite a
cooling economy and weakening corporate earnings, resulting in a
market that even China's bullish securities regulators eventually
admitted had become too frothy.
But the slide that began in mid-June quickly showed signs of getting
out of hand.
A surprise interest-rate cut by the central bank at the end of June,
relaxations in margin trading and other "stability measures" did
little to calm investors, many of whom have borrowed heavily to play
the stock market.
STILL EXPENSIVE
In a series of announcements on Saturday, China's top brokerages
pledged to collectively buy at least 120 billion yuan ($19.3
billion) of shares to help steady the market, and said they would
not sell while the Shanghai Composite Index remained below 4,500, a
level last seen on June 25.
Underlining scepticism beyond mainland China about the
sustainability of the measures, Hong Kong listed shares of Chinese
brokerages took a beating on Monday.
In addition, 28 companies that had been approved to launch IPOs
announced they had suspended their plans.
The U-turn is consistent with past IPO freezes in China when share
markets were falling sharply, though they are usually spun as
spontaneous company decisions, not as government directives.
The aim was to signal to China's army of retail investors, who
conduct around 85 percent of share transactions, that the government
is standing behind the market.
Analysts cautioned, however, that the latest policy moves may only
bring short-term respite.
"The government measures are only aimed at stabilizing the market,
and providing an exit for those who want to get out," said Liu Li,
analyst at Shanxi Securities Co.
"Theoretically, the central bank's money is unlimited, but you
cannot expect the government to use public money to buy shares which
are still expensive, such as ChiNext shares."
(Additional reporting by Pete Sweeney in Beijing and Donny Kwok in
Hong Kong; Writing by Alex Richardson; Editing by Will Waterman)
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