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China’s tools for propping up its stock market: Warnings, liquidity boost

Investors pay attention to the stock market at a securities trading room in Fuyang city, east China’s Anhui province, Dec. 29, 2023.

CFOTO | Future publications | fake images

Chinese financial authorities have worked to shore up the country’s stocks through various measures, including measures aimed at increasing liquidity in the market, warnings against bad practices and resorting to proverbs.

With domestic markets already erasing gains after the People’s Bank of China announced measures to increase liquidity last month, there are questions about whether this well-known playbook from Beijing will have a significant impact on the markets.

On Tuesday, Central Huijin, a unit of the giant sovereign wealth fund China Investment Corporation, said it had expanded purchases of exchange-traded funds linked to the country’s local stocks to safeguard market stability.

This follows successive statements in recent days by China’s securities regulator aimed at calming investor nerves, including promising to “guide” institutional investors to increase investment and encourage companies to step up buybacks. of actions.

The China Securities Regulatory Commission also warned against “malicious” short selling on Monday and said it would step up scrutiny of margin financing following a volatile trading session. It had made sure to protect investors’ interests on Sunday after local markets plunged as much as 3% before paring losses on Friday.

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“Here’s a warning: Don’t test the law or you’ll end up pulling chestnuts out of the fire,” the country’s securities regulator said late Monday, in a literal CNBC translation of two Chinese proverbs.

These measures are reminiscent of previous attempts to shore up market declines. Central Huijin is part of the “national team” of Chinese state-linked investors who have been employed to prop up the stock market with strategically timed purchases.

Social stability is at the heart of President Xi Jinping’s approach to “high-quality” financial development, adhering to a “combination of the rule of law and the rule of virtue.”

market volatility

The CSI300 index of the most liquid Chinese shares listed in Shanghai and Shenzhen rose as much as 1.7% on Tuesday after Central Huijin’s announcement, extending a rally from five-year lows.

The benchmark index closed up 0.7% on Monday in a volatile session that saw the index sink as much as 2.1%. It is still down almost 5% this year.

However, the worst of the volatility has been in small- and mid-cap names, favored by quantitative hedge funds among other professional investors.

The CSI1000 rose as much as 2.6% on Tuesday, recovering from a record low set on Monday. It is still down more than 25% so far this year, compared to the CSI300’s 4.9% drop.

It's only a matter of time before we have a

The CSI 1000 Index of small and mid-cap names is one of the most popular underlying benchmarks for derivatives, futures and other structured products.

Bloomberg reported late Monday that China was tightening trading restrictions for domestic institutional investors as well as some offshore units.

In a speech last month, Xi said financial supervision should be “thorny” and sharp, while all efforts should be made to prevent and resolve financial risks, especially systemic risks, to foster a financial culture with Chinese characteristics. .

Bloomberg also reported that Chinese regulators were to brief Xi on Tuesday on the state of financial markets.

The Chinese central bank’s 50 basis point cut to reserve ratio requirements, announced on January 24, took effect on Monday. It will inject 1 trillion yuan ($139.8 billion) in long-term capital into the market ahead of the week-long Lunar New Year holiday.

“In the risk management process, corruption should be resolutely punished and moral hazards should be strictly prevented,” he added.

— CNBC’s Evelyn Cheng contributed to this story.

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