China's US$1.3 trillion stock rout tests limit of intervention

[HONG KONG] A world-beating rally in Chinese stocks has turned into the biggest rout globally, shocking investors with the severity of its reversal and evading state efforts to slow the pace of losses.

In just 14 trading days, the nation's benchmark CSI 300 Index has plummeted 14 per cent from a 13-year high. That compares with a 2.2 per cent drop by the MSCI All-Country World Index. The plunge has wiped out more than US$1.3 trillion of value and hammered the holdings of retail investors who piled in at the peak, betting that the new lunar year of the Ox, or bull, would be auspicious. State intervention on Tuesday briefly arrested the tumble, before losses resumed.

The CSI 300 rose 1.2 per cent on Wednesday.

The question on traders' minds now is how far the slump will go, given the CSI 300 is only a couple of bad days away from entering its first bear market in two years, and whether the authorities will do more to calm sentiment. The hand of the state has become less obvious since 2018, when the government reportedly liquidated a handful of mutual funds it had formed three years earlier to purchase stocks during a crash.

But the government has long acted to ensure China's financial markets are stable, especially around key events. The ongoing National People's Congress (NPC), a closely watched political pageant used to unveil major policy priorities, is one such occasion. To see such turmoil in markets while the NPC is in session is highly unusual. The last time the CSI 300 lost more than 1 per cent during the annual event was in 2014, and the current pace of losses would be the biggest since 2008.

State-backed funds, known as China's "national team", stepped in on Tuesday in order to ensure stability during the NPC, according to people familiar with the matter. A Hong Kong-based trader, who declined to be identified discussing client business, said entities linked to mainland funds were actively buying shares through stock links with Hong Kong Tuesday morning.

The efforts were initially successful: the CSI 300 erased a 3.2 per cent drop to gain 0.3 per cent in just over an hour in morning trade. Yet the gauge renewed its decline in the afternoon to close down 2.2 per cent at its lowest level since December, a move that stood out against an upbeat day in global shares.

The yuan swung between gains and losses amid the ructions in the stock market before rising 0.2 per cent against the greenback as at 6pm. There was no significant impact on China's local credit market, traders said.

The China Securities Regulatory Commission didn't immediately reply to a fax seeking comment on whether state funds were behind Tuesday's moves. Large insurers in Beijing and Shanghai bought stocks on Tuesday as the market tumbled, according to a Shanghai Securities News report.

To be sure, the authorities had in some ways encouraged the recent correction. Officials repeatedly warned of asset bubbles and said that curbing risks in the financial system was this year's key policy goal. Their comments came as signs of speculative activity increased: Liquor maker Kweichow Moutai Co, for instance, had surged 30 per cent in just over a month to be worth more than US$500 billion, making it one of the world's most valuable stocks.

Yet, in a country where the government is paranoid about control, the stock market is a tough beast to harness. Rallies tend to morph into manias, and declines have a habit of spiralling out of control. That suggests that more measures will be taken to prevent the rout turning into a panic in a year where the Communist Party will celebrate its 100th anniversary.

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