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China's stock rollercoaster: Policy pledges and investor anxiety

China's stock rollercoaster: Policy pledges and investor anxiety

In the midst of another tumultuous trading session on Monday, Chinese stocks grappled with heightened volatility, building on the previous week's market upheaval. Investors found themselves at the crossroads of uncertainty as they carefully evaluated the latest assurances from policymakers aimed at stabilizing the beleaguered equity market.

Within the market landscape, the small-cap shares segment bore the brunt of the turbulence, with the CSI 1000 Index witnessing a substantial intraday plunge of over 8%. The morning session saw a staggering 984 members of the index experiencing declines. The broader market indices also reflected this unease, with the CSI 300 benchmark initially facing a 2.1% drop before staging a recovery, and the Shanghai Composite Index managing to halve its earlier 1.8% decline as we read in Finance.

The economic backdrop reveals a stark reality, with approximately $7 trillion being wiped off the combined value of equities in China and Hong Kong since their peaks in early 2021. A protracted property downturn, lackluster economic data, and geopolitical tensions with the United States have collectively fueled this downward trajectory.

Investors now find themselves contending with the looming specters of margin calls and forced liquidation, heightened by the fact that the recent pledge of support from authorities lacked specific details on how they intend to navigate the ongoing market tumult.

Ken Wong, an Asian equity portfolio specialist at Eastspring Investments, sheds light on the mounting pressure faced by medium and small caps. Some investors had placed bets on increased national team support for larger caps, resulting in a shift in trading dynamics. Popular trades, such as going long on CSI 300 and short on CSI 500 and CSI 1000, have further contributed to the complex challenges confronting the market.

The CSI 1000 gauge, a crucial benchmark for derivatives, found itself under increased selling pressure as certain products reached knock-in levels, resulting in losses for investors.

The persistent market downturn has given rise to concerns about an impending wave of margin calls, with the fear that investors may face forced liquidation if they fail to replenish their margin trading accounts in a timely manner.

In response to these anxieties, the China Securities Regulatory Commission stepped forward on Sunday, pledging to prevent abnormal fluctuations. Their proposed measures include guiding more medium- and long-term funds into the market and cracking down on illegal activities such as malicious short selling and insider trading.

However, traders remain skeptical, having become accustomed to the government's incremental approach to stimulus in the past.

The recent surge in trading volume in select exchange-traded funds has fueled speculation about potential state fund intervention to support the market. Yet, historical trends suggest that such purchases may lack sustained impact, leaving the market participants grappling with uncertainty.

Amid this climate of economic uncertainty, some market participants interpret the sharp market movements as indicative of a potential market bottom. Ma Xuzhen, a fund manager at Longquan Investment Management, characterizes the current stage as the final leg of a selloff, suggesting that the market might be approaching its minimum.

Foreign funds briefly shifted to net buyers during the morning session, mirroring patterns observed on the preceding Friday. However, by the mid-day break, they reverted to withdrawing 729 million yuan ($101 million) of shares, highlighting the tentative and fluctuating nature of investor sentiment.

In a notable proposal amid the market turmoil, Liu Yuhui, an academic at a government think tank, advocates for the establishment of a stock stabilization fund. The primary objective would be to boost market confidence, with a suggested target fund size of 10 trillion yuan ($1.4 trillion) or more.

Expressing their frustrations in a novel way, thousands of investors turned to a social media account of the US embassy in Beijing to vent about the economy and the continuous descent of share prices.

This move underscores the challenges faced by Chinese internet users in finding a suitable platform to voice their grievances, given the restrictions imposed on official accounts of state agencies or media.

David Chao, a strategist at Invesco Asset Management, offers a perspective on the current situation, noting that it remains uncertain whether the current market conditions signify the bottom for Chinese equities.

Nevertheless, policymakers have signaled their reluctance to witness further declines, providing some investors with a glimmer of hope that the market may be on the path to stabilization.



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