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 Over the past two weeks Chinese authorities have cut interest rates,
suspended initial public offerings, relaxed margin lending and
collateral rules and enlisted brokerages to buy stocks, backed by
cash from the central bank.
Some analysts predict further moves to come from the People's Bank
of China, which often makes policy announcements over the weekend,
such as another rate cut or relaxation of the amount of cash banks
must hold as reserves (RRR).
The frantic efforts to stem a more than 30 percent market slide
finally began to gain traction on Thursday, when shares rose around
6 percent after the securities regulator banned shareholders with
large stakes in listed firms from selling.
The CSI300 index of the largest listed companies in Shanghai and
Shenzhen rose another 5.4 percent on Friday, while the Shanghai
Composite Index closed up 4.5 percent.
"Chinese investors move in herds," said Samuel Chien, a partner of
Shanghai-based hedge fund manager BoomTrend Investment Management
Co. "After panic selling drove the market down to the extreme,
prices are now starting to move in the other direction."
RIPPLE EFFECT
At the depths of their slump earlier this week Chinese shares had
fallen by close to a third from their mid-June peak, and for some
global investors China's market turmoil had become a greater concern
than the crisis in Greece.
In the first sign that market losses could feed through into
depressed spending in the broader economy, China's automakers
association more than halved its 2015 forecast for vehicle sales
growth to 3 percent, from 7 percent, on Friday.
"The stock market has some impact on car sales as it hurts cash
flow," association chief Dong Yang told reporters.
Analysts at Bank of America Merrill Lynch said in a research note
that the biggest damage from the market turmoil was likely to be the
denting of investors' faith in the ability of Chinese policymakers
to manage asset prices smoothly.
The BofA Merrill analysts also expected the ripple effect to
eventually hit the real economy and corporate earnings.
"We expect this will likely hurt consumption down the road," the
note said. "More critical is a potential distortion to credit flows
due to the impairment to financial institutions' balance sheets."
Other economists disagreed that the tumult in the stock market was
likely to have a big impact on consumption.
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Although China's equity market is dominated by retail investors,
Julian Evans-Pritchard at Capital Economics in Singapore said only a
relatively small, wealthy portion of the population owned shares.
"Indeed, given that the stock market didn't provide any noticeable
boost to spending on the way up, there is no reason to expect it to
be a drag on the way down," he wrote.
MALFUNCTIONING MARKET
While Beijing's efforts appear to have put a floor under the stock
market for now, it is still far from back to normal.
Around 1,300 of China's listed companies - nearly half the market -
remained suspended after a scramble by firms earlier in the week to
escape the carnage by having trading in their stock halted. About 60
companies resumed trading on Friday.
Many of those that remained trading, meanwhile, were propped up by
state-directed buying.
On Friday, Shanghai Securities News reported that insurers had
bought 112.3 billion yuan ($18.1 billion) of equity since the rout
began.
The plunge in China's previously booming stock markets, which had
more than doubled in the year to mid-June, has created a major
headache for President Xi Jinping and China's top leaders, who are
already grappling with slowing growth.
Many investors say China's unprecedented attempts to arrest the
slide have undermined its commitment to give markets a "decisive"
role in pricing assets.
"They can probably stabilize the market, but it will be a political
decision, as they will have to compel government, state agencies,
banks, pension funds, insurance companies to buy," said Ashok Shah,
investment director at London & Capital.
"Essentially the political decision is: to transfer the potential
losses from private investors ... to the state in some manner."
(Additional reporting by Pete Sweeney and Kazunori Takada; in
Shanghai, Jake Spring and Winnie Zhou in Beijing and Pratima Desai
in London; Writing by Alex Richardson; Editing by Will Waterman and
Ian Geoghegan)
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