(Bloomberg) — Chinese stocks pared most of their early gains on Monday, showing once again that Beijing’s efforts to boost markets are faltering in the face of economic concerns.
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After opening 5.5% higher thanks to a series of market support measures announced over the weekend, the CSI 300 mainland stocks pared its lead to around 1.4% by 2:46pm in Shanghai. Foreign funds accelerated selling during the day, in preparation for this month’s outflows to their largest ever volume.
Traders were expecting more aggressive steps after the authorities’ latest efforts failed to stop the market’s decline. The measures announced on Sunday included lowering the fee charged for stock trading from 0.1% to 0.05% from Aug. 28, the first cut since 2008. The China Securities Regulatory Commission also restricted share sales by major stakeholders in companies that fell. its stock prices. under certain levels. It cut margin rates for leveraged trades and said it would slow the pace of initial public offerings.
“Today’s opening was a bit strong, and this level of noise is understandably causing some people to walk away from the table,” said Lin Mingan, fund manager at Shanghai Xiejie Asset Management Co. “The measures have generally addressed the issues of outflows.” The dilution of funds in the market, rather than a source of new liquidity.
Read: Everything China is doing to stimulate its flagging economy
Monday’s price action suggests that foreign investors need to see concrete steps aimed at reviving the economy before returning to the Chinese stock market, one of the worst performing markets in the world, in August. While Beijing is taking steps to boost market sentiment, China’s economic slowdown is due to structural and entrenched problems that are difficult to fix.
Global funds have sold the equivalent of $1.1 billion in mainland stocks on a net basis through trading links with Hong Kong so far in the session, according to data compiled by Bloomberg.
The last time China cut its stamp duty was in April 2008, when it lowered it to 0.1% to support the market after the drop, which led to a 9.3% rise in the Shanghai Composite Index in the next session and spurred a rally the following year. The index rose as much as 5.1% on Monday. In May 2007, the authorities raised the interest rate to 0.3% to calm the rally, which was attracting more than 300,000 new investors daily.
The restrictions imposed by the Securities and Exchange Commission (CSRC) on share sales by major stakeholders apply to companies whose share prices have fallen below initial public offering or net asset levels, or those that have not paid sufficient dividends. Less than half of domestic companies are trading above book value and initial public offering price, according to data compiled by Bloomberg.
The set of changes this time is expected to bring the equivalent of 750 billion yuan ($103 billion) of new money into the market annually, according to estimates by Huatai Securities. “The new restrictions on stock sales actually prevent the sale of about 250 billion yuan of funds, and bring the strongest liquidity benefit” among the measures, analysts including Wang Yi wrote in a note.
Meanwhile, some real estate stocks jumped by daily limits as the regulator said the beleaguered sector was exempt from new restrictions on refinancing.
It is likely that the decline in Chinese stocks has reached a level that policymakers can no longer turn a blind eye to. With households suffering from a diminished impact on their wealth as a result of the real estate crisis, revitalizing capital markets has become even more important.
Read: China’s Industrial Profits Continue to Fall As Economy Weakens
Earlier this month, the authorities urged pension funds, major banks and other major domestic financial institutions to increase their equity investments to support the market. Regulators have also lowered handling fees on stock transactions, urged mutual fund managers to increase purchases of their stock funds, and encouraged companies to do more share buybacks. The CSRC has reportedly approved 17 ETF products and 20 mutual funds recently in an effort to prop up the markets.
However, foreign investors have been fleeing in droves, and the market’s response to stimulus measures has become increasingly weak in recent weeks. On Friday, the revelations of real estate stimulus measures sparked an initial wave of buying, as China’s benchmark CSI 300 index reversed losses. However, the gauge resumed declines about 10 minutes later and ended the day down 0.4%.
The Hang Seng China Enterprises index advanced 1.6%, paring its previous jump of 4.1%. While the gains helped trim its losses for the month of August to less than 10%, the measure of Chinese stocks listed in Hong Kong remains one of the worst performers in the world among more than 90 stock barometers tracked by Bloomberg.
The stamp duty cut “shows the urgency of policymakers to change market sentiment, but last time it was followed by massive stimulus, which may not be the case this time,” said Marvin Chen, an analyst at Bloomberg Intelligence. “The key to a sustainable reclassification continues to be economic growth momentum, and more political support will be needed.”
The yield on 10-year Chinese government bonds rose as much as five basis points on Monday – the most since late July – on bets that some investors are more likely to switch to stocks from bonds. The offshore yuan advanced as much as 0.3% before erasing almost all of the gains.
The People’s Bank of China set its daily reference rate for the yuan at its strongest level since mid-August, continuing the trend of stronger-than-expected fixations for the managed currency. It also injected the largest amount of short-term cash into the financial system since February, a measure likely aimed at managing liquidity needs at the end of the month.
“We expect a rise this week, perhaps to a lesser extent than that since China cut stamp duty in 2008,” said Niu Wang, managing director of New York-based Evercore ISI for China research. Wang added that the transformation of the A-tier stock market will not happen unless Beijing adopts more “bazooka” measures, such as the 4 trillion yuan stimulus package it introduced in 2008.
–With assistance from Iris Ouyang, Zhu Lin, and Wenjin Lv.
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