China scrambles to reassure jittery stock traders

Chinese authorities are scrambling to reassure jittery investors after soaring stock markets plunged, threatening to set back economic reform plans.
The market benchmark soared 150 percent from the start of the boom late last year in one of the world’s fastest runups. It hit a peak June 12 and then reversed course and plunged 28 percent. It rebounded temporarily Tuesday before losing 5.2 percent yesterday.
A prolonged slump could disrupt Communist Party plans to use stock markets to make China’s state-dominated economy more productive. The party wants state companies to raise money through stock sales to reduce debt and hopes they will compete harder if they answer to outside shareholders. It hopes stock investing will give an aging populace more options to save for retirement to ease demand for social spending.
“The government must pay great attention to the stability of the capital market for the sake of the health of the overall economy,” said Liu Yanchun, an economist at Renmin University in Beijing.
Chinese leaders have responded with a rapid-fire series of measures to shore up investor confidence.
On Saturday, Beijing announced its fourth interest rate cut since November. That was followed Monday by an editorial in the state-run China Securities Journal that declared the market was in the midst of a “30-year golden era.”
Also Monday, the government announced its 3 trillion yuan (USD500 billion) pension fund for public employees will start investing in stocks — a huge infusion of money, though that process is expected to be gradual.
China’s stock market has little direct connection to its economy. Since trading began in 1990, the mainland’s two exchanges in Shanghai and the southern city of Shenzhen have been used mostly to raise money for state companies, not entrepreneurs who create jobs and wealth. Investors react to changes in regulation and availability of credit to finance speculation rather than economic fundamentals.
And although it is among the world’s biggest, China keeps its market sealed off from most global capital flows.
The latest boom took off after the state press last summer declared stocks underpriced. Millions of novice investors piled in, assuming Beijing would prop up prices if needed. Brokerages lent freely to finance trading. In November, regulators added to the influx of money by launching a program that allows Hong Kong investors limited access to mainland exchanges.
Momentum picked up even as growth in the world’s second-largest economy sank to a two-decade low of 7.4 percent last year.
The market frenzy comes at a time when communist leaders are in the midst of complex, marathon effort to transform China’s economy. They have tightened controls on investment that helped to drive the past decade’s double-digit growth rates. At the same time, they are trying to nurture a slower, more self-sustaining expansion based on domestic consumption, services and technology-based industries.
Beijing wants to encourage broader public stock ownership but appeared to be alarmed by the speed of the price rise. In April, brokers were ordered to curb lending to traders and to limit other risks.
Investor enthusiasm finally faltered in mid-June after stronger economic data reduced expectations Beijing might ease credit further and concern over a glut of new stock offerings by Chinese companies.
That caused the market index to fall 14 percent last week. Gains for recent buyers were wiped out. Some sold shares to repay brokerage loans, fueling fear that might set off a downward price spiral.
On Monday, the Chinese securities regulator tried to reassure investors the decline was the natural result of a “too rapid” rise in prices.
“This is a result of normal market action,” said Zhang Xiaojun, a spokesman for the China Securities Regulatory Commission, on the agency’s microblog account.
Zhang tried to dispel fears of a selloff to repay brokerage loans.
“The scale of forced selling is small,” he said in the statement. “The risk is controllable.”
The latest announcements helped to reassure at least some investors.
“This week, from Monday, I thought I was going to fall apart, because I lost 35 percent of all my investments,” said Christine Wang, 30, an office worker in Shanghai. “But I think that I should make it back.” Joe McDonald, Business Writer, Beijing, AP