China Brokers To Buy At Least $19.3 Billion In Shares To Calm Market

As the bear market in China deepens, falling nearly 30 percent, after reaching a 52-week high on June 12, which has wiped out nearly $3 trillion dollars, which is more than Brazil’s gross domestic product (GDP), China’s top 21 securities brokerages say that they will be setting up a market-stabilization fund that will invest at least 120 billion yuan ($19.3 billion) to help stabilize the country’s stock markets, according to a statement on the website of the Securities Association of China.

Reuters notes that a number of policy moves over the past week, including an interest rate cut (the fourth cut in seven months) to a record low and a relaxation of margin lending rules, has failed to stop the sell-off.

China’s stock market is highly levered, and that’s a major worry for global investors. The levels of leverage could potentially destabilise the world’s second-largest economy.

The group of brokers met on Saturday in Beijing to discuss the market situation. They expressed “full confidence” in the development of China’s capital markets, according to the statement.

The group of 21 securities brokers, led by Citic Securities, said they will invest the equivalent of 15 percent of their net assets as of end of June, or no less than 120 billion yuan ($19.3 billion) in total, in blue-chip exchange-traded funds.

The brokerages agreed that they will not sell off holdings as long as the Shanghai Composite Index is below 4,500 points, the statement said.

In China, stocks were surging over the past 12 months as the Shanghai Composite Index spiked 152 percent and reached a 52-week high through June 12, and the market cap of Chinese stocks rose above $10 trillion for the first time ever. However, Chinese stocks have sharply changed direction and recently suffered their biggest two-week plunge since December 1996 after falling over 20 percent and fell into a bear market on Monday.

But the bear market has only grown deeper, as over the course of this week the plunge in Chinese equities has broadened, reaching its steepest three-week decline since 1992, and has wiped out nearly $3 trillion in market capitalization through Thursday, which is around the size of Brazil’s gross domestic product (GDP).

On Friday, losses in China extended as its CSI300 Index closed -5.4 percent, bringing losses on the week to 10.4 percent, and the Shanghai Composite Index closed -5.8 percent.

Losses on Friday bring the three-week tumble to nearly 30 percent and nearly erased most of this year’s gains.