SocGen: China's rescue plan for the stock market is threatening its financial system

China has doubled down again today with its stock market rescue efforts.

It has suspended roughly half of all issues from trade, announced new margin requirements – for short sellers only, and encouraged brokerages, insurance companies and employees to buy shares in Chinese firms. Indeed, Reuters reported that the China Securities Finance Corporation has lent 260 billion Yaun to brokerages “to help them buy stocks via proprietary trading, the country’s securities regulator said on Wednesday.”

Yet at lunch the Shanghai Composite is down 3.88% at 3,582.

But, the battle between the market and Chinese policy makers has much broader implications for the Chinese economy according to Societe Generale economists, Michala Marcussen and Klaus Baader. They believe that in using the power of institutional money to try to stem the haemorrhaging stock market, the Chinese authorities are potentially spreading the risk in a manner which undermines financial stability in China.

The Chinese government is trying hard to stabilise the stock market. As one of the key measures, nearly all the big nonbank financial institutions are called to increase their investment in the market and one of them, China Securities Finance Corporation, is granted the access to the PBoC’s liquidity support. We think that the rescue plan could potentially increase the systemic risk down the road. Initially most of the stock market risk was with households, but with the rescue plan, systemically important institutions are taking up more risk when the market is still under immense downward pressure. Our biggest concern is that the progress of structural reform could suffer as the result.

That’s a theme a Sydney-based fund manager picked up on this afternoon. He told Business Insider that the rescue efforts were “intentionally spreading contagion across the economy.” The CCP and PBOC would probably counter that they are utilising the economy’s resources to stop a speculative bubble from impacting the broader economy.

Whatever the outcome, all of the Chinese financial system is now invested in the Shanghai stock crash. That can’t be a good thing.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.