China is stepping up efforts to stabilize markets as confidence plummets

(Bloomberg) — Chinese authorities have stepped up efforts in recent days to prop up financial markets, in a sign that Beijing is growing increasingly uncomfortable with the pace of decline in stocks and the yuan.

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Mainland stock exchanges this week asked some investment funds to avoid net selling of stocks. Officials have asked state-owned banks to step up intervention to support the yuan, while encouraging companies listed on the tech-heavy Star Council to buy back shares. The securities regulator said late Friday that it would cut handling fees for stock transactions and consider extending trading hours for stocks and bonds.

The moves complemented a surprise rate cut from the People’s Bank of China this week, which was the largest cut since 2020, and the strongest guidance to adjust the yuan ever on Friday.

So far, these measures have yet to support the markets. A gauge of Hong Kong-listed Chinese stocks was on course for a third straight week of losses. The Hang Seng Index has fallen more than 8% this year, ranking among the biggest losers globally. The scale entered a bear market on Friday. And while the yuan posted marginal gains against the dollar Friday morning, it has fallen more than 5% this year.

Reeling from dismal economic data, deflation fears, a weak housing market and a crisis in the shadow lending sector, mainland financial markets are facing the possibility of a vicious cycle of capital outflows. Foreign investors were net sellers of Chinese stocks on Friday, capping a record string of outflows.

“Debt strains from real estate developers and local government financing vehicles are rippling throughout the Chinese economy,” Gavekal Research analyst Xiaoxi Zhang wrote in an August 16 note.

Other investors maintain a more positive long-term outlook. Focusing on China’s problems may be regressive at this point as it may be a good time to look for equity opportunities given lower valuations, Joshua Crabbe, head of Asia Pacific equities at Robeco Hong Kong Ltd, said in an interview with Bloomberg TV.

Among other things, Crabb expects more incentives to boost consumption. Other items to watch in Beijing’s toolkit include lowering stamp duty on stock trading, raising foreign investment caps and relaxing stock trading rules.

The announcements of lowering stock delivery fees and considering extending trading hours “may help mitigate some financial market volatility and lower transaction costs, but they don’t address the underlying issues of lack of confidence and economic momentum,” said Marvin Chen. Strategist at Bloomberg Intelligence.

— With assistance from Paul Allen, Sherry Ann, and John Cheng.

(Updates to add Hang Seng Bear Market Entry, CSRC Moves and more comments.)