China stems stocks rout, but market faces lengthy hangover

Thu Jul 9, 2015 5:38am EDT
 
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By Koh Gui Qing and Kazunori Takada

BEIJING/SHANGHAI (Reuters) - Beijing's increasingly frantic attempts to stem a stock market rout were finally rewarded as Chinese shares bounced around 6 percent on Thursday, but the costs of heavy-handed state intervention are likely to weigh on the market for a long time.

The rebound came after China's securities regulator, in its most drastic step yet to arrest the slump, banned shareholders with large stakes in listed firms from selling. The banking regulator said separately it would allow lenders to roll over loans backed by stocks.

The CSI300 index of the largest listed companies in Shanghai and Shenzhen raced higher to close up 6.4 percent, while the Shanghai Composite Index bounced 5.8 percent for its biggest daily percentage gain in six years.

But China's malfunctioning stock markets remained semi-frozen, with the shares of around 1,500 listed companies worth around $2.8 trillion - roughly half the market - suspended, and many of those still trading propped up by state-directed buying.

"The authorities are capable of slowing the selling and extending market support," said Mark Konyn, chief executive officer at Cathay Conning Asset Management Ltd in Hong Kong.

"However, this high level of intervention comes at a significant cost. Such intervention locks up ownership of shares, reduces liquidity and creates an overhang that could plague the market for years."

More than 25 percent has been knocked off the value of Chinese shares since mid-June, and for some global investors the fear that China's market turmoil will destabilize the financial system is now a bigger risk than the crisis in Greece.

"We are inclined to believe that Beijing will escalate policy responses until they start working," said economists at Credit Suisse in a research note.   Continued...

 
An investor watches an electronic board showing stock information at a brokerage office in Beijing, China, July 9, 2015. REUTERS/Kim Kyung-Hoon