China Moves to Stabilize Stock Market

NEW YORK, July 7, 2015, /Xinhua/ — Chinese regulators’ response to the country’s stock market following a three-week losing streak has been encouraging and in line with what is needed to stabilize the market, US experts have said.
Shanghai SE Index dropped over 11% in past five trading days.

“The policymakers’ moves over the past weekend are very tuned with the market. They realize the market needs to be stabilized at this juncture,” Brendan Ahern, chief investment officer of US fund company KraneShares, told Xinhua on Monday.

On Saturday, 28 Chinese companies scheduled for IPOs announced that they would postpone follow-up issue of shares due to recent fluctuations.

Meanwhile, 21 major securities brokers in China promised to spend no less than 120 billion yuan ($19.62 billion) on exchange-traded funds that track the performance of blue-chip stocks.

In addition to these steps, last weekend, China’s central bank lowered both the interest rate and the reserve requirement ratio for banks to inject liquidity into the market.

Ahern said the string of measures was in accordance with the three main factors that triggered recent plunges in the stock market: corrections for the bull market, excessive supply of IPOs, and extensive use of margin.

“The onshore markets have performed very well over the last year without a correction, which we are now experiencing. Corrections and pullbacks are healthy for a bull market,” he said.

He added that the large number of IPOs in June created more supply than demand, which also weighed on the stock market.

When talking about margin, Ahern said the regulators’ concern over margin is appropriate, particularly in the ChiNext market.

“The policies are really to help stabilize the market to allow the deleveraging to take place,” he said.

He pointed out that ChiNext and some small caps may have further volatility because of the continued emphasis by regulators and policymakers on blue-chip stocks.

Ahern also noted that this round of market pullback provides an opportunity for foreign investors who missed the initial rally in the Chinese stock market to enter.

“I think as foreign investors recognize the strong will of the policymakers and regulators to stabilize the market, you potentially have a very strong opportunity to buy into the market,” he said.

James Xiong, head of Quantitative Research at Morningstar Investment Management, an arm of Morningstar Inc, a provider of independent investment research in the United States and in major international markets, made a suggestion for investors in the Chinese stock market.

“Most investors tend to underperform market index because they buy high and sell low,” he said.

“Investors should talk to professional financial advisors to set an appropriate asset allocation with disciplined rebalancing based on one’s risk tolerance and risk capacity,” Xiong said.