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Confidence to soar after Beijing places buy orders
Reuters in Shanghai
20 September 2008
Unprecedented intervention by the central government may boost the mainland’s stock market as much as 20 per cent in coming weeks while supporting the yuan’s exchange rate and slowing a steep fall in market interest rates.
In recent weeks, mainland financial markets have been caught in a triple play of plunging equities, currency weakness and sliding bond yields.
By using government money to buy shares from the market, authorities stand a good chance of breaking this cycle and reducing the risk of capital flight, fund managers, analysts and traders said on Thursday.
“The decision to buy shares in major banks is a signal of support for the market, and it shows confidence the shares are decently valued,” said Wu Haijun, Shanghai principal at Power Pacific Corp of Canada, a foreign investor in Chinese stocks. “The market-boosting steps should allow the stock index to rebound around 20 per cent over the next several weeks.”
The government announced after the markets closed on Thursday that Central Huijin Investment, an arm of the country’s sovereign wealth fund, would help stabilise the stock market by buying shares in listed companies, including three top state-owned banks.
It is the first time in the nearly 18-year history of China’s modern stock market that authorities have announced a central government agency will buy stocks in order to support the market.
Authorities also scrapped the 0.1per cent stamp tax on purchases of equities, and urged state-owned enterprises to buy back shares of their listed units from the market.
The Shanghai Composite Index has plunged 69 per cent from October’s peak and hit a 22-month closing low on Thursday. About US$3 trillion of capitalisation on the Shanghai and Shenzhen stock exchanges has been wiped out since December.
The government’s intervention will not remove key reasons for the slide: a huge overhang of stock becoming newly tradable as lock-up periods for controlling and institutional shareholders expire, and slowing growth in the economy and corporate profits.
But by waiting until the market had dropped to levels where stocks were no longer expensive by historical standards, authorities have maximised the chances of their intervention succeeding, analysts said.
The average price-earnings ratio of A shares is at a record low of 16 times historic earnings, last hit in late 2005 when the market was ending a four-year slump.
“The market is likely to continue the rebound for at least several weeks since investors will expect further market-friendly policies if needed,” said Qian Qimin, an analyst at Shenyin & Wanguo Securities.
The government did not say how many shares it would buy, but Huijin has access to about two-thirds of the assets of China Investment Corp, which was set up a year ago to manage US$200 billion of foreign currency reserves.
Although the central bank has kept the yuan largely stable against the dollar in the spot market, the weakness of China’s stock and property markets helped push the yuan down sharply in the offshore forwards market this month.
This week, after a surprise monetary easing by the central bank, non-deliverable forwards began for the first time in five years to imply yuan depreciation against the dollar over the next 12 months. This threatened to encourage capital outflows.
“The stock market support steps should give the yuan a shot in the arm, as they will dampen expectations for major capital outflows,” said a senior dealer at a North American bank in Shanghai.
China’s five-year government bond yield has tumbled 70 basis points over the past five weeks as the central bank has eased monetary policy and as money has fled the stock market in favour of bonds.
Duan Yunfei, a bond analyst at China Merchants Bank in Shenzhen, said the stock market rescue would probably not halt the downtrend in yields over the medium term, because the country had apparently entered a monetary easing cycle.
But a stock market rebound could slow the bond rally by drawing money back to equities, he said.