China to Set Up Fund to Curb Stock Selloff
Total of 21 brokerages to invest $19.3 billion in the fund amid concerns that the selloff could spread to other parts of the economy
BEIJING—China is establishing a market-stabilization fund aimed at fighting off the biggest stock selloff in years, as concerns grow among the Chinese leadership that the stock-market malaise could be spreading to other parts of the world’s second-largest economy.
Senior Chinese officials, including those at the State Council, China’s cabinet, the central bank, and the country’s top securities regulatory agency, are meeting Saturday to discuss another round of measures aimed at arresting the stock slide, according to people familiar with the matter.
The move comes after that the benchmark Shanghai Composite Index has lost more than a quarter of its value since a high on June 12. Previous steps including an interest-rate cut by the central bank have failed to impress investors, many of whom have been forced to unwind their leveraged bets as stocks continue to drop.
Chief among the measures being discussed Saturday is the setup of a fund that will be used to prevent stocks from falling further, the people said.
The fund will get its initial financing from China’s big securities firms. According to a statement from the Securities Association of China on Saturday afternoon, some 21 Chinese brokerages led by Citic Securities Co. will invest the equivalent of 15% of their net assets as of the end of June, or no less than 120 billion yuan ($19.3 billion) in total, in the fund. But that amount is unlikely to be enough. The plunge in Chinese equities in the past three weeks has wiped out about $2.4 trillion in market value—or about 10 times Greece’s gross domestic product last year.
As a result, the People’s Bank of China is expected to provide financing to the stabilization fund either directly or indirectly through the country’s giant sovereign-wealth fund, the people said. Any such move would require approval by the State Council, the Chinese government’s top decision-making body.
A further selloff in stocks would hurt Chinese companies’ ability to raise funds and pay off debt, which, in turn, could add more downward pressure on the economy. Fears are also growing among policy makers that the stock turmoil could lead to instability in the broader financial system.
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Of particular concern is the mountain of debt by investors who borrowed to buy shares. Debt incurred by so-called margin financing has risen almost fivefold over the past year to about 2 trillion yuan ($323 billion) last month. The jump in such leveraged bets has led to fears of a stock-market collapse in China, which could wipe out the savings of millions of small-time investors and ignite social instability. Meanwhile, it could also pose a serious threat to the country’s banking system as many borrowers have taken out loans using stocks as collateral. A drop in stock prices would mean banks are owed much more than the collateral is worth, resulting in more losses for the lenders at a time when bad-loan levels are already rising.
On Thursday, Zhou Xiaochuan, China’s central-bank governor, said the PBOC must “hold fast to the bottom line that no systemic or regional financial risks should occur.”
The market-stabilization fund will first invest in blue-chip exchange-traded funds to help stabilize the main market, the people said. Its mandate could be widened to include the broader market.
The governments of many Asian economies including Hong Kong, Thailand, South Korea and Japan intervened in the capital markets during the 1998 Asia financial crisis through market-stabilization funds or other means. The U.S., meanwhile, also spent hundreds of billions of dollars purchasing distressed assets and providing cash directly to banks during the 2008 global financial crisis.
Chinese officials over the past week have dug deep for measures to stop massive stock selloffs. Still, the array of attempts—from easing restrictions on investing with borrowed money to interest-rate reduction—so far have failed to encourage investors to buy.
Many analysts are attributing the continued declines to margin calls, which brokerages issue to investors who have borrowed money from them when stocks fall below a certain threshold.
In the statement by the Securities Association, the 21 brokerages also pledged not to reduce any proprietary investments but to try to increase investments in the stock market as long as the Shanghai index stays below 4,500. The index closed down 5.77% on Friday at 3686.92.