Attempts to maintain China's market rally look increasingly desperate

Photo: A Chinese beer drinker at the Qingdao festival. Photo: Getty

Have Chinese policymakers lost control of the nation’s stock market?

The list of measures rolled out to support the market have been numerous, and increasingly frequent over recent weeks.

We’ve seen the PBOC cut interest rate and cash reserve requirements for banks, the CRSC placed a ban on short selling, announce an investigation into possible market manipulation and place a temporary halt on new share listings while the government’s Ministry of Finance has allowed the nation’s giant social security fund to increase their market weighting towards Chinese stocks. Several brokerages have also been allowed to relax margin trading requirements for some investors and been allowed to tap additional sources of capital to support the use of leveraged trading.

It’s an amazing cavalcade of measures to support the market, and one that looks set to grow according to some market rumours.

Stocks in Shanghai exploded at the start of trade today, up almost 8%, but the rally quickly fizzled. The benchmark Shanghai Composite slipped briefly into negative territory after the lunch break.

While it is understandable that policymakers want to reduce the volatility in China’s stock market it is becoming increasingly clear that they only want the market to move one direction – higher.

There are several reasons that they would like to see the stock market move higher. The boost to household incomes will assist in lifting levels of consumption, while higher stock prices will help industry consolidation and provide new sources of capital for smaller Chinese firms. Clearly a strong stock market will help to achieve these goals.

Still, one has to wonder why policymakers see the need to have this happen at a breakneck pace. It’s not as if Chinese stocks have underperformed over the past 12 months. Despite the recent declines, something that has seen major indices lose around 30%, Chinese stocks still sit around 80% higher than levels of a year ago. Hardly a return to scoff at!

Perhaps it’s the true state of the Chinese economy that has got authorities worried. The measures announced to support the stock market have not only been frequent, to the outsider they look downright desperate.

China’s economy has failed to show any significant improvement in the second quarter of the year despite a significant amount of monetary policy easing. With the real economy remaining weak, and this years 7% growth target looking harder to achieve, perhaps this explains the urgency to resuscitate the faltering bull market in stocks.

Not only is it necessary to boost consumption and open up additional funding sources for Chinese firms, it also contributed significantly to Chinese GDP in the March quarter. Should it unravel, the prospects for economic growth in the remainder of the year look particularly weak.

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