The huge scale of Chinese government intervention to staunch a stock market sell-off has been revealed by reports showing the country’s biggest state-owned banks have provided the equivalent of more than $200bn to help prop up equities.
Much larger than previously disclosed, the lending to the country’s margin finance agency highlights the sense of urgency with which top officials viewed the threat to the financial system and the broader economy as the stock market cratered earlier this month.
The Shanghai Composite index lost more than a third of its value in roughly three weeks, dropping from a seven-year high in mid-June to hit a low point on July 9. Markets have since rebounded, recovering by 17 per cent. But the magnitude of state support casts doubt on whether the rally is sustainable without government support.
According to the latest revelations, the big state-owned banks have lent a combined Rmb1.3tn ($209bn) in recent weeks to the China Securities Finance Corp, for lending on to brokerages to finance their investment in shares and to purchase mutual funds directly.
The operation echoes a move by the Hong Kong authorities in 1998 to prop up the local stock market by buying 11 per cent of the Hang Seng, funded by drawing on foreign currency reserves.
The CSF was established in 2011 to lend to securities brokerages to support margin lending to stock investors. Amid the tumble in equities, however, the government has deployed CSF as a conduit for injecting rescue funds into the stock market. The latest reports reveal that the country’s big commercial lenders have been a major funding source for CSF.
Caijing, a well-known Chinese financial magazine, reported on Friday that the country’s sixth-largest lender by assets, China Merchants Bank, provided the largest single loan, at Rmb186bn.
The country’s five largest banks —Industrial and Commercial Bank of China. China Construction Bank, Agricultural Bank of China, Bank of China and bank of Communications— each provided more than Rmb100bn. In total, 17 banks provided interbank loans worth about Rmb1.3tn through July 13, the magazine reported on its website.
The People’s Bank of China had previously said it was “actively assisting” CSF to obtain liquidity through interbank lending, bond issuance and other methods. The central bank later confirmed it had provided loans directly to CSF, without specifying an amount.
In addition to injecting funds into the market, regulators adopted other interventions including a temporary ban on stock sales by major shareholders, a commitment by state-owned brokerages and fund companies to devote their own capital to supporting the market, and a police investigation into “malicious” short selling.
CSF also recently issued bonds worth Rmb800bn in the interbank market, where commercial banks are the biggest investors. Combined with the loans, that brings CSF’s total war chest to over Rmb2tn even without including direct loans from the central bank.
The Caijing report suggests the PBoC is seeking to minimise its direct role in lending to CSF, preferring to rely on commercial banks to provide funds for the stock market rescue.
“I think what the PBoC wants to achieve is like ‘do whatever it takes’, as said by [European Central Bank president Mario] Draghi to boost confidence [in the euro], but no need to really print money to buy stocks. They want to do easing, but not this way,” said Larry Hu, China economist at Macquarie Securities.