Rebound could be technical move

WHILE we saw a bounce in most Asian equity markets on Tuesday, Chinese stocks continued to fall as state buying was nowhere in sight. This raised the question whether the rebound was just a respite.

The Shanghai Composite decimated the 3,000 level, closing down 7.6 per cent, at 2,964.97. Likewise, the China A50 and CSI 300 tumbled 6.4 per cent and 7.1 per cent respectively. The absence of government intervention meant there was no stop-safe in the freefall of the Chinese markets. Bloomberg reported that China has stopped intervention in the stock market this week as some officials are sceptical about the support measures.

The key argument for not continuing to cushion the stock market was the limited impact that domestic equities have on the Chinese economy. We have previously mentioned that a huge chunk of Chinese households' finances are kept in bank deposits and properties, and equity investment constitutes a small portion. Secondly, the costs of supporting the market is too high. We have a glimpse of this view when the China Securities Regulatory Commission (CSRC) said that the China Securities Finance Corp (CSFC), the state agency designated to support the Chinese equities, would not increase its equity holding unless there is excessive volatility and systemic risk. However, I feel that the recent sharp selloff qualifies as excessive fluctuations. This means that the government simply thinks that any contagion from the falling stocks is expected to be contained. Furthermore, the Chinese government is passing on the buck by allowing pension funds to invest up to 30 per cent of their net assets in equities.