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July/August 2015

Editorial

Stabilising China’s stock markets

At the time of writing, investors across the globe are watching the Greek debt crisis unfold. Yet China is experiencing a crisis of its own, with the Shanghai and Shenzen Indices having lost almost a third of their value since the highs set on 12th June this year.

In order to help prevent the country’s stock markets from plummeting further, and to prop up investor confidence, the Chinese authorities decided in early July to suspend initial public offerings (IPOs). This is not a new tactic from Chinese officials, as a similar move was seen in 2012, but this time around, the ban is expected to cover a far larger pipeline of deals. In fact, reports suggest that as many as 28 IPOs that were due to go ahead on the Shanghai and Shenzhen stock exchanges have now been (voluntarily) suspended.

The hope is obviously that such a move will help preserve liquidity, as well as stabilising the markets by encouraging investors to get behind stocks that are already listed. What is not yet clear is how long the IPO ban is set to last. Judging from past experience, it could remain in place for over a year, or as little as three months.

Alongside this IPO suspension, Chinese officials have also moved to create a so-called ‘market stabilisation fund’ – which is the first of its kind in the country’s history. This will be funded in part by the top brokerages in China, who have reportedly pledged to buy at least RMB 120bn ($19.3bn) of shares between them. In a separate move, 25 Chinese mutual funds have also announced that they will invest a portion of their capital (amount not yet specified) into stocks in order to help reverse the downward trend.

Whilst the Chinese authorities appear to be doing all they can to help turn the situation around – these latest measures come in addition to an earlier interest rate cut, a relaxation of margin-lending rules and extra bank liquidity – many analysts believe the moves are too short term in their outlook and could seriously impact the long-term health of the country’s stock markets. That said, Beijing is very much stuck between a rock and a hard place, needing to do whatever it takes to restore confidence before other parts of the Chinese economy are impacted.

As always, Treasury Today Asia will continue to monitor developments in this space and keep you updated. To make sure you get all the latest industry news and commentary, sign up to receive our complimentary weekly e-newsletter, Treasury Insights, by visiting treasurytoday.com/insights-sign-up.