China’s stock exchange regulator has imposed severe limits on stock market selling, having earlier warned of panic in the market as a range of recent government measures failed to prevent stocks plummeting a further 6%.
After 10 minutes of morning trading a wave of listed companies’ shares had been suspended across China’s two stock markets after they dropped by the daily limit of 10%.
The China Securities Regulatory Commission ruled that controlling shareholders and managers holding more than 5% of a company’s shares could not reduce their holdings for six months, in an attempt to maintain stability in the markets.
Earlier, the regulator’s statement saying there had been a surge in “irrational selling” and “panic sentiment” had done little to calm investor nerves.
The Shanghai composite index closed down 5.9%, while the SCI 300 index of the biggest listed companies in Shanghai and Shenzhen lost 6.8%.
The rout spread to other world stock markets, with Hong Kong’s Hang Seng index closing almost 6% down, its biggest one-day drop for nearly seven years.
Since their June peak, Shanghai stocks have plunged 30% in the space of three weeks, having soared more than 150% in the previous 12 months as millions of -private investors piled in. “It’s a stampede,” said Wang Feng, a former Wall Street trader who founded the hedge fund firm Alpha Squared Capital. “And the problem of the market is that all the players move in the same direction and are too emotional.”
About 1,400 companies, or more than half of those listed in Shanghai and Shenzhen – filed for a trading halt on Tuesday in an attempt to prevent further losses. Chen Jiahe, chief strategic analyst at Cinda Securities, said this suspension was likely to last until the market was stabilised and liquidity was returned to the market.
Christopher Balding, professor of economics at Peking University, said it was not possible to know exactly why so many companies had suspended trading, but that a large number were doing so because they had used their own stock as collateral for loans and wanted to “lock in the value for the collateral”.
Unlike most other stock markets, where most investors are institutional, in China 80% are small retail investors. Balding said this was raising concerns of “political risk” in Beijing. With large numbers of private investors losing a lot of money, the government would be worried about “people protesting on the streets”.
As part of the attempt to prevent further losses, China’s state asset regulator had already ordered state-owned enterprises not to sell shares of their listed companies.
The People’s Bank of China said it was assisting the China Securities Finance Corporation (CSFC), the national margin trading service provider – which helps brokers lend money to institutions to buy shares – to help steady the market.
Chinese stock market is nose diving.
It said it would do this through measures such as aiding interbank lending. It would keep a close watch on the market, continue to support the CSFC and guard against systematic and financial risks.
The CSFC said it would buy more shares of small and medium-sized companies, which have suffered the biggest losses.
Chen said: “The market is panicking and the government is trying to save it, so we are having something like a conflict between the two powers and we are not sure which will be the strongest.”
Ayako Sera, a senior market economist at Sumitomo Mitsui Trust Bank in Tokyo, said: “Today is all about China, with Greece in the background … Shanghai’s early losses were like a cliff dive, which had a huge impact on investor sentiment.”
The continued sell-offs came after a surprise interest rate cut by the central bank at the end of June. Relaxations in margin trading and other “stability measures” have done little to calm investors. Analysts said they expected the falls to continue.
“I don’t see it getting better,” Balding said. “There is not going to be a turn around within the next week or two. It probably has a long way to go.”