China hunts for ‘manipulators’ as stocks tumble

An investor walks past as information displayed on an electronic screen at a brokerage house in Shanghai, China, 3 July - Reuters

SHANGHAI (Reuters): Chinese stocks tumbled again on Friday, taking the week’s losses to more than 10%, as the securities regulator said it was investigating suspected market manipulation amid increasingly desperate attempts by Beijing to head off a full-blown crash.

After a slump of nearly 30% in Chinese stocks since mid-June, the China Securities Regulatory Commission (CSRC) has set up a team to look at “clues of illegal manipulation across markets”.

A flurry of policy moves over the past week, including an interest rate cut and a relaxation of margin lending rules, have failed to arrest the sell-off.

“The Government must rescue the market, not with empty words, but with real silver and gold,” said Fu Xuejun, strategist at Huarong Securities Co, adding that a market crash would hurt banks, consumption, companies and even trigger social instability. “It’s a disaster. If it’s not, what is it?”

The CSI300 index of the largest listed companies in Shanghai and Shenzhen dropped 5.4% to close at 3,885.92, while the Shanghai Composite Index shed 5.8% to 3,686.92 points.

For the week, the CSI300 lost 10.4% and the SSEC fell 12.1%.

The Shanghai benchmark fell below 4,000 points on Thursday for the first time since April - a key support level that analysts had expected Beijing to defend.

The rout in China’s highly leveraged stock market has become a major worry for global investors, who fear a meltdown could destabilise the world’s second-largest economy at a time when growth is already slowing.

Chinese stocks had more than doubled between November and mid-June, fuelled in large part by retail investors using borrowed money to bet on shares.

“This is happening against an (economic) growth backdrop that continues to look soft, as illustrated by the flat manufacturing survey this week,” noted analysts at Barclays.

“With growth data still soft, China remains a key uncertainty for the global outlook.”

The China Daily newspaper said on Friday that the CSRC was probing investors who used stock index futures to “short” the market – or bet on prices falling.

Sources with direct knowledge later told Reuters that the China Financial Futures Exchange (CFFEX) had suspended 19 accounts from short-selling for a month.

Much of the selling of Chinese stocks has been driven by “margin calls”, when a brokerage that has extended credit to an investor to buy stocks demands more cash or collateral because prices have fallen.

If those margin calls continue, it also could affect other markets as investors need to raise cash.

“Some funds have closed their copper positions to send funds back to China, in order to meet their margin payments on stock indexes,” said one metals broker in Hong Kong.

Herald van der Linde, Asia equity strategist at HSBC, said there were signs that some of the money being pulled out of stocks was going into other assets, with a pick-up in physical property transactions.

“It could go to Hong Kong, it could go to property, it could go to cash,” he said. “But if they have to repay debt, it’s basically deleveraging, as well.”

Beijing has been struggling since the weekend to find a policy formula that would restore confidence in its stock markets.

So far, rapid-fire steps including easing monetary policy, encouraging more pension funds to invest in stocks and cutting transaction costs have failed to stem the slump.

The CSRC has relaxed rules on using borrowed money to speculate on stock markets, letting brokerages set their own tolerance level on margin calls and allowing the rollover of margin lending contracts.

On Friday, the regulator also said it would step up its monitoring of markets to protect investors against the mis-selling of investment products.

China is due to release second-quarter gross domestic product data on 15 July, and many economists expect growth to dip below 7%, which would be the weakest performance since the global financial crisis.

China brokerages pledge to buy at least $19.3b in shares to stabilise market

Beijing: China’s top 21 securities brokerages said on Saturday that they would collectively invest at least 120 billion yuan (US$ 19.3 billion to help stabilise the country’s stock markets after a slump of nearly 30% since mid-June.

A flurry of official policy moves over the past week, including an interest rate cut and a relaxation of margin lending rules, has failed to arrest the sell-off.

The rout in China’s highly leveraged stock market has become a major worry for global investors, who fear a meltdown could destabilize the world’s second-largest economy at a time when growth is already slowing.

The brokerages met on Saturday in Beijing to discuss the market situation and expressed “full confidence” in the development of China’s capital markets, a statement on the website of the Securities Association of China said.

“Twenty-one securities brokerages will jointly invest 15% of net assets as of the end of June, or no less than 120 billion yuan, in blue chip exchange traded funds,” it said.

The brokerages will not sell off holdings as long as the Shanghai Composite Index is below 4,500 points, the statement said.

The SSEC index fell 5.8% on Friday to end at 3,684 points.

Listed securities companies among the 21 brokerages, along with their major shareholders, also would proactively buy back shares, the statement said.

Beijing has been struggling to find a policy formula to restore confidence in its stock markets.

After the market close on Friday, the China Securities Regulatory Commission (CSRC) said China would cut initial public offerings and capital raisings and support long-term investors entering the market to help stabilise prices.

The People’s Bank of China (PBOC) also rolled over 250 billion yuan of medium-term loans to banks late on Friday to ensure adequate liquidity in the system.

Chinese stocks had more than doubled between November and mid-June, fueled largely by retail investors using borrowed money.

Investors say constant tinkering with monetary policy and regulations to try to temper the stock market slide raises wider questions about whether China is ready to open up its capital markets and have more influence in the international financial system.

Hong Kong stock exchange to introduce volatility controls from mid-2016

Hong Kong (Reuters): The operator of Hong Kong’s stock exchange said it will introduce new controls to rein-in volatility, in a long-awaited announcement that comes as Chinese shares see wild price swings, fueling fears of a mainland market collapse.

Hong Kong Exchanges & Clearing (HKEx) said on Friday that it will proceed with a proposal, unveiled in January, to introduce a so-called closing auction and other volatility curbs that would bring it in line with international peers in New York and Europe.

HKEx said it will give the market a year to prepare for a phased implementation of the new controls, with the roll-out beginning from mid-2016.

The exchange had held off on reintroducing a recalibrated closing auction for several years amid opposition from influential local retail brokers who claimed the mechanism could give rise to market manipulation.

On Friday, however, the HKEx finally bowed to overwhelming pressure from international investors who say the measures are critical to Hong Kong’s status as an international financial centre.

The HKEx has come under intense scrutiny in recent weeks following a series of jaw-dropping moves that saw stocks such as Hanergy Thin Film Power Group and Goldin Financial Holdings lose up to 50% of their value in less than two hours.

Chinese shares listed in Hong Kong had surged earlier this year along with a sizzling speculative rally in mainland markets, which more than doubled over the last year. But mainland shares have plummeted some 30% in recent weeks, pulling down Hong Kong’s China Enterprises Index by more than 10%.

All major stock exchanges use an auction at the end of the trading day to reduce volatility when calculating closing prices. Buy and sell orders are pooled during a five- or 10 minute period and are then matched at the best available price.

In Hong Kong, the closing price is based on continuous trading, whereby orders are matched immediately.

According to research by State Street Global Advisors published in 2012, volatility in Hong Kong during the closing period can be as much as six times greater than in other developed markets.

The HKEx launched a closing auction in May 2008 but scrapped it 10 months later after design flaws actually exacerbated price swings.