18 October 2019
Investors monitor stock prices at a brokerage house in Shanghai. Market sentiment remains fragile. Photo: Reuters
Investors monitor stock prices at a brokerage house in Shanghai. Market sentiment remains fragile. Photo: Reuters

Rumors of government plans to exit stock market fuel scare

Many foreign investors have criticized Beijing’s intervention measures to stem the stock market slide. However, it’s quite normal in China for the government to intervene in market operations. Fund managers should not use the metrics of free markets in the West in China.

Investor confidence has yet to be restored, although the market appears to be stabilizing since last week thanks to massive buying with government money.

According to local media reports, authorities are studying plans to withdraw funds recently deployed to help improve market liquidity.

One plan is to allocate stocks to brokerages in order to increase supply and avert a drastic rally. Another plan is to keep stocks at the China Securities Finance Corp. in order to ease market concerns about selling pressure. A third plan is to switch stocks into exchange-traded funds and allocate them to brokerages proportionately.

It’s just a matter to time that such measures will be adopted. However, investors are reluctant to face the music given the fragile market sentiment.

The Shanghai Composite Index swung back to loss for a while in response to the news.

Zhang Xiaojun, spokesman of the China Securities Regulatory Commission, has dismissed the reported plans and stressed that the regulator would “continue stabilizing the market, restoring market confidence, and preventing systematic risks”.

The government has unveiled various policy incentives in recent days, but they have had very limited impact on the market.

In contrast, rumors that government funds will exit the market have unnerved investors. This is another sign that market sentiment remains weak.

Government funds appear to have been used again on Monday to further bolster market confidence. PetroChina jumped as much as 6.7 percent, reversing an earlier loss of 2.8 percent. The stock closed with a gain of 4.3 percent.

The Shanghai Composite Index edged up 0.88 percent to close at 3,992 points. Market turnover for Shanghai and Shenzhen increased to 1.3 trillion yuan (US$209.3 billion).

Currently, the mainland market can only afford good news.

Beijing announced that the government will discuss its 13th five-year blueprint during the 5th plenary meeting to be held in October.

The market will be flooded with various guidelines for various industries in the next three months, from which new market themes will emerge.

As long as investors are confident, liquidity will return. The market themes will provide them with materials to speculate on stocks.

That being the case, investors should pay attention to stocks that would benefit from government policy and have already gone through deep correction.

Internet plus, industrial upgrading and information technology will be some of the key themes for next five years.

This article appeared in the Hong Kong Economic Journal on July 21.

Translation by Julie Zhu

[Chinese version中文版]

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a columnist at the Hong Kong Economic Journal