Bonds, Currencies, Emerging Markets, Metals, Stocks

China Suspends IPOs Until Further Notice, Sets Up Market-Stabilization Fund Amid Stock Plunge

Chinese authorities are ramping up their efforts to stabilize its markets as initial public offerings (IPOs) will be suspended until further notice following nearly a 30 percent crash in stocks over the past three weeks that has wiped out $3.2 trillion of value, which is more than Brazil’s gross domestic product (GDP) and over 10 times the size of Greece’s GDP.

China Market Crash 2015 PS

Chinese authorities are ramping up efforts to stabilize its markets as initial public offerings (IPOs) will be suspended until further notice following nearly a 30 percent crash in stocks over the past three weeks that has wiped out $3.2 trillion of value, which is more than Brazil’s gross domestic product (GDP) and over 10 times the size of Greece’s GDP.

China has decided to suspend sales of new stocks until further notice in an effort to preserve liquidity in an increasingly volatile market, The Wall Street Journal (WSJ) reports.

It’s unclear at this point how long the suspension on IPOs in China will last. Previous IPO bans in the country have lasted as little as three months and as long as 14 months.

Analysts had estimated that the planned IPOs in China could attract as much as four trillion yuan ($645 billion) in funds, the WSJ said.

The decision came following a meeting on Saturday with high-level senior officials from the State Council, China’s cabinet, its Central Bank, its top securities regulatory agency, and other financial agencies to discuss another round of measures to help arrest the stock plunge, the WSJ reports.

China’s top 21 securities brokerages also announced on Saturday that they will be setting up a market-stabilization fund that will invest at least 120 billion yuan ($19.3 billion) in the country’s stock markets, according to a statement from the Securities Association of China.

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 by the Securities Association of China said that “excessively rapid rises and falls in the stock market are not conducive to the stable and healthy development of the market, and as major players in this market, securities companies must take the initiative to shoulder responsibility, to unify as one, merge our wills and safeguard market stability with all our strength.”

China’s Central Bank, the People’s Bank of China (PBOC), is expected to provide financing to the stabilization fund — either directly or indirectly — through the country’s giant sovereign-wealth fund, according to the WSJ.

Hours after the securities industry’s statement on Saturday, the government-backed Asset Management Association of China gathered leaders of 25 major Chinese mutual fund houses who promised to subscribe to their companies’ equity funds and said they would seek to speed up the application and issuance of equity funds, however they did not provide any further details, Reuters reports.

The moves on Saturday come amid growing concerns among China’s leadership that the stock panic could intensify and spread to other parts of the world’s second-largest economy after 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 market sell-off.

Here’s more from the WSJ:

A further selloff in stocks would hurt Chinese companies’ ability to raise funds and pay off debt, which, in turn, could add more downward pressure on the economy. Fears also are growing among policy makers that the stock turmoil could lead to instability in the broader financial system.

Of particular concern is the mountain of debt by investors who borrowed to buy shares. Debt incurred by so-called margin financing has risen almost fivefold over the past year to about two trillion yuan last month. The jump in such leveraged bets has led to fears of a stock-market collapse in China, which could wipe out the savings of millions of small-time investors and ignite social instability. It also could pose a serious threat to the country’s banking system, as many borrowers have taken out loans using stocks as collateral. A drop in stock prices would mean banks are owed much more than the collateral is worth, resulting in more losses for the lenders at a time bad-loan levels already are rising.

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.

The plunge into a bear market prompted China’s securities regulator to urge investors to be rational and not to believe “shorting China rumors”.

“We will continue to support domestic and foreign capital to invest in the stock market,” China Securities Regulatory Commission spokesman Zhang Xiaojun said. “We expect investors to have confidence and independent judgment of the market, and not to believe irresponsible rumors.”

But Zhang’s plea failed to boost sentiment and 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, wiping out $3.2 trillion in market capitalization.

On Friday, losses in China deepened 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 stock plunge to nearly 30 percent and have erased most of this year’s gains.

Shanghai Composite Index as of 03JUL2015.  Chart courtesy of StockCharts.

Shanghai Composite Index as of 03JUL2015. Chart courtesy of StockCharts.

Following steep losses, the China Securities Regulatory Commission (CSRC) has set up a team to look at “clues of illegal manipulation across markets” following weeks of plummeting stocks, the China Daily reported on Thursday.

The China Financial Futures Exchange (CFFEX) has suspended 19 accounts from short selling for a month in an effort to avoid a further market crash, Reuters reported on Friday.

China’s Central Bank Governor Zhou Xiaochuan on Thursday called for China’s financial sector to intensify risk monitoring and said that the PBOC must “hold fast to the bottom line that no systemic or regional financial risks should occur,” Chinese state-run Xinhua news agency reported.

But the market crash in China could get a whole lot worse, according to Patrick Chovanec, the Managing Director and Chief Strategist at Silvercrest Asset Management, who said on June 30 that Chinese stocks could fall another 50 percent.

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