China's stock market is at a deep low, will the government expand its measures?

The Financial Times reported, citing three people familiar with the matter, that the China Securities Regulatory Commission had held meetings with investment banks in the past few days and informally requested through "window guidance" to postpone the listing of companies. The report also said that large-scale reductions in holdings by existing shareholders have been temporarily suspended until the market recovers.

Reuters could not immediately verify the report. China's financial regulator has not responded to Reuters' request for comment.

“Fine-tuning” has little effect

The China Securities Regulatory Commission, the People's Bank of China and the State Administration of Financial Supervision announced on Monday (November 2) that they have held meetings with securities companies and fund companies to discuss measures to stabilize the stock market, including changing the stock repurchase and holding re-loan tool from a phased arrangement to a long-term institutional arrangement, and lowering the stock repurchase and re-loan interest rate from 1.25% to 1%, etc.

However, these efforts to boost the stock market have had little effect. On Tuesday (November 3), artificial intelligence-related stocks led the decline, and the major A-share indexes fell in shock. As of the close, the Shanghai Stock Exchange Index fell 0.82%, the Shenzhen Stock Exchange Component Index fell 1.21%, the GEM Index fell 2.73%, and the Science and Technology Innovation Composite Index fell 4.84%. More than 3,300 stocks across the market fell.

Investors believe that current financial support measures are insufficient. Industry insiders pointed out that the current problem lies in the lack of confidence in the market. Once confidence is lost, continued cash buying must be relied on to support the stock price. However, the current market stabilization measures introduced by the government still urge market participants to fund themselves, rather than directly providing funds from the government. Major shareholders lack sufficient incentive to borrow money to buy declining stocks because they must bear the corresponding risks themselves.

Previously, dragged down by a plunge in artificial intelligence-related stocks, China's stock market benchmark CSI 300 index plunged 8.5% in October, its largest monthly decline in more than a decade. Since the beginning of this year, this index has fallen by about 14%, while the US S&P 500 Index has risen by 10% during the same period.

The "national team" takes action?

In September 2024, China stimulated the economy by cutting interest rates and lowering the deposit reserve ratio, thus starting a bull market in the following two years. Yu Xiangrong, chief China economist at Citi, said: "Given that both real and nominal growth are under pressure, we believe that policy support on a scale comparable to September 24, 2024 may not be far away."

The economist team at UBS also believes that policy support is expected to further strengthen, but downplays the possibility that policy strength will be comparable to that of more than two years ago, because in its view, China's economic growth is still within the acceptable range of policymakers.

On Monday, the People's Bank of China announced that it would raise the foreign exchange deposit reserve ratio from 4% to 6% starting from November 15. This is the first time in the past five years that the central bank of China has raised the foreign exchange reserve requirement ratio. The RMB exchange rate suffered its largest single-day decline in five months. The central bank's move aims to "cool down" the recent rally in the yuan. Curbing the excessive rise in the RMB exchange rate will help exports, which are the only bright spot in the current Chinese economy.

In addition, investment bank Goldman Sachs estimated that about 170 billion yuan flowed into designated exchange-traded funds (ETFs) in just two weeks in October, with the so-called "national team" (investment companies backed by Beijing) stemming the stock market decline through supportive purchases, China.Table reported.

According to reports, stabilizing the stock market is also a sensitive social issue for Beijing. After years of falling real estate prices, the stock market was supposed to boost market confidence, thereby encouraging people to increase investment income and consumer spending.

However, the dismal performance of the stock market over the past few months has undoubtedly been a huge blow to many retail investors. "They had hoped that Beijing's billions of dollars of investment in chips, artificial intelligence and robotics would drive up stock prices. However, those investors who came in late are now suffering huge losses."

The report believes that the current situation may prompt Beijing to carry out its most powerful intervention in the stock market in the past year and a half.

(Reuters, China.Table)