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[SHANGHAI] Chinese stocks rose, capping the benchmark index's biggest two-day gain since 2008, as unprecedented government intervention helped curb an equity rout that erased US$3.9 trillion in less than a month.
The Shanghai Composite Index rallied 4.5 per cent to 3,877.80 at the close, adding to Thursday's 5.8 per cent surge. With more than 1,300 companies still halted on mainland exchanges, trading was limited to 53 per cent of the market. The rebound helped the gauge climb 5.2 per cent this week after tumbling to three-month lows on Wednesday.
Official measures to support shares became more extreme during the week as declines deepened. They include a ban on stockholders and executives from selling stakes in listed companies for six months, an order for companies to buy equities and an investigation by the nation's public security bureau into short-selling. Even as stocks rebounded, foreigners have been net sellers of Shanghai shares every day this week, while local investors continued liquidating bullish bets on the exchange on Thursday.
"The measures introduced by the authorities needed some time to have an effect on the market and they have finally started to show results," said Gerry Alfonso, a sales trader at Shenwan Hongyuan Group Co in Shanghai. Stock halts will continue for "some time" as "companies and regulators clearly want to have them coming back to trading without impacting the overall market."
President Xi Jinping's government is deploying the heavy hand of the state to prevent falling stock prices from eroding confidence in his leadership. China now has more than 90 million individual investors, outnumbering members of the Communist Party.
More than 600 companies rose by the 10 per cent daily limit on the Shanghai Composite on Friday. Gauges of industrial, consumer staple and health-care stocks jumped more than 7 per cent on the CSI 300 Index, which gained 5.4 per cent. The Hang Seng China Enterprises Index advanced 3.8 per cent in Hong Kong at 3.22 pm, while the Hang Seng Index added 2 per cent.
The rebound pared losses by the Shanghai Composite since its June 12 high to 25 per cent. While the median price-to- earnings ratio in China has dropped to 57 from 108 at the height of the rally, valuations are almost three times as high as those on the Standard & Poor's 500 Index.
Fidelity Investments, which oversees the largest China funds outside of the mainland, says Chinese stocks are a buy following the selloff.
"As far as the fundamentals are concerned, we are actually quite confident," Robert Bao, a Hong Kong-based money manager at Fidelity, which oversees more than US$2 trillion globally, said in a telephone interview. "We are fully invested."
Bank of America Corp said the market is now dependent on the state. There is a decent chance of "another leg down" for stocks within the next few months when the government starts to withdraw its support in terms of liquidity, David Cui, Bank of America's head of China equity strategy, said on a conference call on Friday. Unless the government keeps pushing the market higher, selling pressure will probably "stay relentless" because of leverage, he said.
Margin traders cut holdings of shares purchased with borrowed money for a record 14th day on the Shanghai Stock Exchange Thursday. The outstanding balance of margin debt on the nation's two bourses has dropped by US$132.6 billion from the peak on July 8 to US$232.6 billion through Wednesday.
A five-fold surge in margin debt over the 12 months through June 12 had helped propel the Shanghai index to a more than 150 per cent gain.
Foreigners sold shares through the city's exchange link with Hong Kong on Friday, extending a record four-day outflow, according to data compiled by Bloomberg.