Shanghai Stock Exchange suffered its biggest drop since 2007 and the government says it will keep intervention – Financial Journal

I. Bouquets / C. Morales

The Shanghai Stock Exchange yesterday suffered the second largest fall in its history, placing greater pressure on the Chinese authorities have taken unprecedented in the last month to try to stop the collapse of markets.

The Shanghai Composite Index 8.5%, its biggest drop since February 2007 fell, while the Shenzhen Composite fell 7%. In response, the authorities declared that they are prepared to buy shares to stabilize the market and avoid “systemic risks”.

More than 1,700
shares fell 10%, the maximum allowed daily, while only 78 rose, as the retail investors rushed out of the market. In China, actions can only increase or decrease up to 10% per day, before transactions are automatically suspended.

Analysts
could not identify an immediate trigger for the fall. Some blamed economic data, while others pointed to the approaching rate hike by the Federal Reserve of the United States.

“It is unclear why the shares fell. Some sources blame fears of reduced government intervention, others weak corporate profits and other weak growth. We are not convinced any of these explanations, “said emerging markets economist at Capital Economics, David Rees, a DF. “The movements in the past not appear to have been based on macroeconomic developments. The context is that the shares of mainland China are in a bubble is deflating,” he said.

Yesterday
government reported that profits of large industrial firms fell 0.3% in June, compared to the same period last year, to 588,570 million yuan. On Friday, meanwhile, a preliminary reading of the purchasing managers index (PMI, its acronym in English) manufacturing showed its lowest level since April 2014.

Rumors that
the government had left the market after an unprecedented intervention in the past month were encouraged by the collapse of 9.6% in the shares of PetroChina. The state oil company had channeled financial support from the government, one of the major pillars of the Shanghai Composite in late June and early July.

Government intervention
The Securities Finance Corporation of China continue to buy shares, said yesterday the official Xinhua news agency. The announcement was made to dispel ‘rumors that the national provider of services operating margin was left to stabilize the stock market, “published Xinhua quoted a spokesman for the China Securities Regulatory Commission, Zhang Xiaojun.

The regulator also warned that the full force applied to persons performing “malpractices”.
authorities have intervened to prop up the domestic stock market since it began its collapse in mid-June after the regulator restrict rules on margin financing, that is, borrowing to buy stocks that are then used as loan collateral. This practice has been common among small investors, representing 85% of trading volume in China.

authorities started to take action after the Shanghai Composite Index reached its minimum July 8, erasing about $ 4 billion of its value.

The measures include the authorization to more than 1,400 companies suspended operations, the prohibition to sell the controlling shareholders its shares and the injection of US $ 480 billion, through a state funding vehicle to support the market. Police also intervened to investigate malpractices.

intervention generates a dilemma for the Chinese government, which must decide whether to continue supporting the bags to generate investor confidence or leave operating market rules, as has been the commitment of President Xi Jinping.

Even the International Monetary Fund called on authorities to withdraw support, arguing that stock prices should be defined by market forces, a person close to the situation said last week.

biggest drops
Even if the government continues to intervene are anticipated, analysts They warn that Chinese stocks continue to fall. Erwin Sanft, China equity strategist for Macquarie, told FT that stocks remain under pressure while individual investors continue shedding positions bought with borrowed money. “Our vision is that the level of financing margin should drop further,” he said.

The market continues
15% above year earlier and 75% above levels a year ago. Therefore, Rees, of Capital Economics, postulated that the decline could be extended to the 3000 points.