There is no stopping the bears from taking the Chinese stock market hostage. The Shanghai Composite Index extended its losses from Monday’s 3.3% drop even after reports swirled that China plans to allow pension funds managed by local governments to invest in the stock market.
Normally, news like this would have stabilized the market and eased fears that the rout will continue. This time, it isn’t.
“It’s not going to turn the market around,” said Stephen Sheung, head of investment strategy at SHK Private. “The market is going to stay volatile for another week because there is a liquidity squeeze. It’s not just Greece that’s affecting the market.”
The liquidity crunch was caused by the quarter-end window dressing of banks to meet regulatory requirements, said analysts, forcing the central bank, the PBOC, to conduct reverse repurchase transactions to infuse money into the financial system.
Exacerbating the fall is the drop in margin financing, which enabled Chinese retail investors to buy shares. Margin debt outstanding at the Shanghai Stock Exchange fell for a fifth day on Friday, according to Bloomberg, the day the main index lost more than 7%.
“Investors want to actually see pension funds buying shares in the market. The problem is, they have not seen any signs that the pension funds are in the market, so they are disappointed,” said Francis Lun, CEO at Geo Securities.
According to Reuters, China’s Ministry of Human Resources and Social Security, as well as the Ministry of Finance have published draft rules that will allow pension funds to invest up to 30% of their net assets in Chinese stocks, equity funds, and balanced funds.
“Right now, it’s (allowing pension funds to buy Chinese stocks) just a rumor,” said Sheung. “But once it is eventually implemented, then it will will have a positive impact on the market.”
Having said that, Sheung said he is still positive on the A-shares traded at the Shanghai stock market as he expects the economy to stabilize in the second half of the year after a series of monetary easing adopted by the PBOC. He also expects reforms that the government has adopted on state-owned enterprises to bear fruit, resulting in better profitability.
China’s stock market officially entered the bear market territory Monday after it fell by 20% from its peak, according to Bloomberg.
Photo credit: Jessie Wang via Flickr