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 Before the market opened, Li said in comments posted on a government
website that China had the confidence and ability to deal with
challenges faced by its economy, but had nothing to say on the
three-week plunge that has knocked around 30 percent off Chinese
shares since mid-June.
After a brief pause in the slide on Monday, the CSI300 index of the
largest listed companies in Shanghai and Shenzhen ended down 1.8
percent on Tuesday, while the Shanghai Composite Index lost 1.3
percent. [.SS]
The ChiNext growth board, home to some of China's giddiest small-cap
valuations, fell 5.1 percent.
Qi Yifeng, analyst at consultancy CEBM, said government measures
were not strong enough to reverse the downtrend, especially as it
was a liquidity issue for many who had borrowed to buy shares and
were now forced to sell to meet margin calls.
"It's just a matter of whether it will fall more slowly, or continue
to slump in freefall," he said.
Exchange data shows the balance of outstanding margin loans has
fallen more slowly than the market drop and that leveraging has
consequently increased to a record proportion of the market,
creating a vicious cycle of pressure to sell.
Global investors have grown increasingly concerned that a full-blown
crash could destabilize the world's second-biggest economy.
Commodities markets are also taking fright at what the slump says
about the underlying economy, with prices of copper, coal ,
natural gas and iron ore falling toward their 2015 lows.
ORCHESTRATED CAMPAIGN
In an attempt to arrest the sell-off, China has arranged a curb on
new share issues and orchestrated brokerages and fund managers to
promise to buy at least 120 billion yuan ($19 billion) of stocks,
helped by a state-backed margin finance company, which in turn has a
direct liquidity line from the central bank.
The official Shanghai Securities News reported that China's major
insurance firms ploughed tens of billions of yuan into blue-chip
exchange-traded funds (ETF) and large caps on Monday.
China Life Insurance Co Ltd bought a net 10 billion yuan in index
funds, while China Pacific Insurance Group and other insurers each
invested more than 1 billion yuan, the newspaper said.
That helped the indexes rise just over 2 percent on Monday, but the
relief was shortlived.
Unlike other major stock markets, which are dominated by
professional money managers, retail investors account for around 85
percent of China trade, which exacerbates volatility.
"Where is the promised 120 billion yuan?" asked one retail investor
from Hangzhou, who gave his surname as Liu. "It's all going to blue
chips. Don't they know that retail investors are all trapped in the
small caps? My stocks opened up 10 percent but closed down the (10
percent) limit!"
Blue chips fared best as a result of the targeted buying, especially
the big five banks; Industrial and Commercial Bank of China, China
Construction Bank, Bank of China Agricultural Bank of China
and Bank of Communications were all up almost by the 10 percent
limit.
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DUCKING OUT
Traders are increasingly nervous about the unusually large number of
Chinese companies asking for their shares to be suspended from
trading, fearing that many of them are looking for excuses to duck
out of the turmoil.
About a quarter of the roughly 2,800 companies listed in Shanghai
and Shenzhen had filed for a trading halt by the close on Monday,
and on Tuesday the Securities Times said another 200 announced a
suspension.
The plunge in China's previously booming stock markets, which had
more than doubled in the year to mid-June, is a major headache for
President Xi Jinping and China's top leaders, who are already
struggling to avert a sharper economic slowdown.
Beijing's interventionist response has also raised questions about
its ability to enact the market liberalization steps that are a
centerpiece of its economic reform agenda.
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.
Underlining scepticism beyond mainland China about the
sustainability of the new measures, Hong Kong listed shares of
Chinese brokerages plunged on Monday.
In addition, 28 companies suspended their previously approved IPO
plans.
Lei Mao, assistant professor of finance at Warwick Business School,
said measures to support the market distorted the allocation of
funds and trading behavior and could create the conditions for
further sharp falls.
"Even an optimistic investor should not participate in the market
for now," he said.
(Additional reporting by Shanghai newsroom; Writing by Will
Waterman; Editing by Alex Richardson)
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