China shares: Regulator takes action after slide

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Media captionThe BBC's John Sudworth reports on the impact of market volatility on small investors

China's regulators are taking fresh steps to try to quell volatility in the country's financial markets.

Investors holding stakes of more than 5% are not allowed to sell shares in the next six months.

The new rule from the country's securities regulator is intended to relieve pressure on the stock market.

Despite efforts to stem the losses, the dramatic sell-off in China's main stock market continued on Wednesday, with the Shanghai Composite plunging 6.8%.

That took share values nearly 30% below their June peak.

On Wednesday, another 500 listed firms said they would stop trading their shares in an effort to insulate themselves from the meltdown.

Around 1,300 firms have halted trading, almost half of China's main shares.

IG chief market strategist Chris Weston dubbed the sell-off "Black Wednesday".

"For the first time, The China Insurance Regulatory Commission (CIRC) has admitted there is genuine 'panic selling' underway.

"When we see around 90% of the market suspended or falling by their daily limit (while further measures have been taken to limit the influence seemingly exerted by futures traders) you know things are becoming less rational," he said.

Chinese stock market losses


fall in Chinese share prices since mid-June

$3 trillion

wiped off value of companies

  • 1,301 companies halted trading, that's more than 40% of the market

  • 90m people in China affected - mostly small retail investors

  • 150% how far shares had risen between June 2014 and June 2015


'Market stability'

Chinese regulators made a string of pledges on Wednesday to try to ease the "panic sentiment" in the market.

The Cabinet agency that oversees China's biggest state-owned companies said it had told them not to sell shares and to buy more "in order to safeguard market stability".

And the CIRC pledged to make more money available to brokerages from its state-backed margin finance firm.

Chinese reaction to government intervention

"It's simply too late," says one user, 'Xingfuchongdianzhan', on social media site Weibo.

"It's good that the government is saving the market," says another, 'You Ni Jiu Zhen Hao'.

"This is really robbing Peter to pay Paul," remarks 'A lan'.

Meanwhile China's outspoken property tycoon Ren Zhiqiang asks, "Who are they [the government] trying to save?"

Investors in China rely on margin financing from these brokerages to borrow money to buy stocks.

Insurers were also given the go-ahead to invest more in blue chip stocks - with the industry watchdog raising limits from 5% of their total assets up to 10%.

Image copyright Reuters

Analysis: John Sudworth, BBC Correspondent, Shanghai

The risk of intervening in an attempt to stop people panicking is that they'll only panic more.

The confidence measures are in full swing - new share offerings have been suspended, brokerages have been ordered to buy shares, and the Chinese state has promised to provide sufficient liquidity to keep the markets up.

But confidence continues to evaporate and hundreds more firms have announced trading halts, taking the total now seeking temporary respite from the storm to more than 40% of the market.

The government appears to be motivated by the fear of a knock-on effect on the real economy as stock market losses hit consumer spending.

But some analysts wonder why it is staking its authority on an attempt to shore up a market that - despite recent sharp losses - is still well up on where it was a year ago.

Read more from John Sudworth here on why small investors have been some of the hardest hit.

The official intervention did little to reassure investors.

The Shanghai Composite closed down 5.9% at 3,507.19, having fallen as much as 8.2% during the session. Hong Kong's Hang Seng index dropped 5.8% to 23,516.56.

Markets in the rest of Asia were also lower, with Japan's Nikkei 225 index closing down 3.1% at 19,737.64.

In Australia, shares fell as the price of iron ore - one of its biggest exports - fell almost 6% to a three month low. The benchmark S&P/ASX 200 index closed down 2% at 5,469.53.

South Korea's Kospi index fell 1.2% to 2,016.21 ahead of the central bank's decision on interest rates on Thursday.

Image copyright AFP
Image caption In China, falling prices are indicated by the colour green

Why China's stock market is falling

As the old adage goes - the value of your investment can go up as well as down. China's stock markets have lost around 30% of their value since the middle of June. And though they're still at March 2015 levels there're some very worried investors. So what's causing the sell-off?

  • Government intervention

Have efforts to stop people panicking caused them to panic more? Government measures to make people more confident in the stock market are in full swing. New share offerings have been suspended, brokerages have been ordered to buy shares and the Chinese state is promising to provide sufficient liquidity to keep the markets up. But still the sell-off continues. So has the urgency of the reaction triggered alarm bells that things may be worse than they seem? As The Economist observes: "Far from saving the market from drowning, the succession of life buoys only pushed it further under water."

  • Herd mentality

About 80% of investors on the Chinese mainland's stock markets are small retail investors - or so-called mum and dad investors. Investing - and talking about their shares - is a national pastime for millions. And many have admitted that they are driven by what their friends and family are doing. "Retail traders are by their nature enthused by momentum," says market specialist Chris Weston from IG Markets. "If the market is rallying, they feel like they need to be involved on fear of missing out. That momentum is now headed sharply lower and so they want out."

  • Profit taking

Some long-term investors are cutting their exposure. Many have made good profits over the long term (the market is up 150% on a year ago) and so as things get rocky, they are getting out. Even those who are sitting on losses, unsure of what to do as the market turns, are losing their nerve and selling.

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