by Philip Wen and Reuters
Beijing
The extended rout on Chinese shares deepened on Tuesday despite Beijing's aggressive rescue efforts, with the steep sell-off casting doubt over the central leadership's economic reform credentials and its ability to prevent the fallout from spilling over into the broader economy.
The failure of investors to respond to the central government's efforts to stabilise markets, analysts say, is of particular concern given the volume of margin calls forcing retail investors into selling their shares.
What ordinarily would have been a sharp price correction broadly confined to the sharemarket, carries much greater risk given the knock-on effects of these leveraged bets – potentially in the trillions of yuan – being forcibly unwound.
This includes a potential flow-on impact to China's property market, where already lacklustre construction demand has weighed heavily on prices for commodities like iron ore.
"That's the really toxic mix here, the fact that you've got margin-lending forced sales which are basically transmitting throughout the economy," said Kevin Yeoh, the Hong Kong-based Managing Director for Asia at J Capital Research.
Qi Yifeng, an analyst at consultancy CEBM, said government measures were not enough to reverse the trend, especially as it was a liquidity issue for many who had borrowed to buy shares and were now forced to sell to meet margin calls.
"It's just a matter of whether it will fall more slowly, or continue to slump in freefall," he said.
In a note on Tuesday, HSBC chief China economist Qu Hongbin said outstanding margin financing was 1.9 trillion yuan, down from a high of 2.3 trillion yuan.
Street estimates, he said, tended to add roughly another 2 trillion yuan of margin lending on top of other channels such as umbrella trusts and wealth management products.
"But even at the top end of the range of estimates, 4 trillion yuan of margin financing should not cause excessive damage to the financial system provided that it is reduced in an orderly way," he said.
In a bid to arrest the sell-off, Beijing ordered a curb on new share issues and instructed brokerages and fund managers to pledge at least 120 billion yuan in a market-stabilisation fund, with assistance from a direct line of liquidity from the central bank.
Remarkably, 700 companies – about a quarter of Chinese companies listed on the main exchanges in Shanghai and Shenzhen – filed for a trading halt by the close of Monday as it became apparent the measures had not achieved the desired result. Another 200 announced a suspension on Tuesday.
The benchmark Shanghai Composite Index closed 1.3 per cent lower on Tuesday, while the Shenzhen Components index lost 5.8 per cent.
The Chinese government's response to the market sell-off is now shaping up as one of the biggest tests of President Xi Jinping's image as a strong leader with both the power and political will to force through difficult economic reforms.
"With authorities throwing a wide range of unprecedented tools (including pensioners' funds) at the equity market in order to prop it up, the stakes are now significantly higher," Andrew Wood, head of Asia country risk at BMI Research, a unit of rating agency Fitch, said in a note.
"A failure to stabilise the market (and indeed to achieve a notable recovery from current levels) could lead to a crisis of confidence in the heretofore infallible state apparatus."
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