China firm on intervention to stabilise stock markets

The China Securities Regulatory Commission (CSRC) has scotched rumours that it would not intervene to stabilise stock markets after share prices on the Shanghai Stock Exchange plunged 8.48 per cent on Monday- the biggest single-day decline in eight years. The benchmark Shanghai Composite Index dropped 345.35 points to close at 3,725.56 points on Monday, while the Shenzhen Component Index fell by 1,025.46 points, or 7.59 per cent, to 12,493.05 points. But countering fears of a free fall and some serious damage to the real economy, some analysts say that it was likely that apprehensions that the government was pulling out market support may have triggered the drop.

The state-run daily Global Times points out that the advocacy by the International Monetary Fund (IMF) that the Chinese government should refrain from rescue measures may have generated a sell-off cascade. However, on Monday, the China Securities Finance Corporation Ltd. (CSF) asserted unambiguously that it would continue to buy stocks to stabilise the market.

Xinhua quoted Zhang Xiaojun, spokesperson with the CSRC as dispelling rumours that the national margin trading service provider had backed off from stabilising the stock market. CSRC is investigating huge sell-offs by some individuals and will punish any malicious short selling, Mr. Zhang said. Observers say that other factors that may have contributed to the market’s fall include the possibility of the US Federal Reserve raising interest rates in the fourth quarter as well as uncertainty regarding China's future monetary policies.

In tune with China’s overall anti-corruption campaign, the CSRC's decision to target insider trading and other irregularities, may have also contributed to the selling spurt. The decision to crackdown had been taken following the earlier market downturn on June 12. This had followed an unsusual bull run, de-linked from market fundamentals, which had resulted in a 152 per cent rise in the Shanghai Composite Index since July 2014. The widespread use of leverage, a practice of using borrowed money to buy shares, appeared to have contributed to the surge, and the following turbulence, analysts say.

But the tightening regulation coupled with frothy market conditions apparently triggered a massive sell-off, resulting in 30 per cent plunge in the index, from its previous peak.