China's willingness to defend its stock markets put to the test

[HONG KONG] The plunge in US equities will challenge China's resolve to keep its equity markets stable.

Signs of state support on Monday helped the Shanghai Composite Index rise 0.7 per cent, the sole gainer in Asia. A record US$1.6 billion of inflows into Hong Kong stocks from mainland investors also insulated the city's bourse from the worst of the declines, with the Hang Seng China index narrowing its loss to 0.4 per cent.

While the Shanghai gauge's correlation with US equity indexes is low, it will be hard for mainland investors to ignore a record points plunge in the Dow Jones Industrial Average. China's stock market was already looking shaky after tighter scrutiny of the asset management industry sparked the biggest loss since 2016 last week.

To mitigate the risk of steep declines, China Securities Regulatory Commission urged brokerages to ask investors with stock pledges to add to their collateral when share prices drop below critical levels, instead of closing out the positions, according to people familiar with the matter. Policymakers have intervened regularly to support stocks since the nation's equity bubble burst in 2015.

Hong Kong's US$5.9 trillion stock market is more vulnerable due to the city's status as a global financial centre with open capital borders. Equities in the former British colony have surged this year - the China H-share gauge is still up 15 per cent - helped by swelling inflows from north of the border. Today will see whether mainland funds commit even more capital as shares sell off, or wait for a better opportunity.

BLOOMBERG