SCENARIOS-What can Beijing do to halt China stocks drop?

HONG KONG, Aug 20 (Reuters) - Shanghai-listed Chinese stocks on Thursday won back all of the previous day’s steep losses but volatility likely means regulators are considering what else they can do to support the market.

Fearing that the abundant flow of new loans in the first half of the year will taper off, investors knocked down the Shanghai composite nearly 20 percent from a peak on August 4 before diving back in on Thursday to drive the index up 4.5 percent, the biggest daily gain since March 4.

Shoring up confidence is the probably the main goal in a market where the government has a visible hand and insider information dominates.

Following are various options for the authorities to support share prices, especially if the Shanghai index drops well below its 125-day moving average of around 2,700 points -- a level widely seen separating bear and bull markets.


Officially plugging up new offerings in China would be one of the more extreme steps regulators could take to stop the rapid decline in stocks. It would send a message that markets have become unstable, as they were in September 2008 -- the last time initial public offerings were effectively suspended.

Authorities have not reviewed any big IPOs since early August when shares began falling sharply. This is a sudden change from July when they were reviewing one big listing a week with the Shanghai composite trading between 3,000 and 3,500 points compared with an intraday low of 2,761 on Wednesday.


The government could ask Central Huijin, part of the Chinese sovereign fund, to buy more shares in Chinese banks and other industries, and encourage state-owned firms to buy back shares of their listed units.

China took these steps in the wake of Lehman Brothers' collapse last September, setting a precedent of government agencies buying shares to support the market for the first time in its stock market's modern history. Huijin supported shares of Industrial and Commercial Bank of China 601398.SS1398.HK, Bank of China 601988.SS3988.HK and China Construction Bank 601939.SS0939.HK.

In March, China Investment Corp said the sovereign fund would keep increasing its stakes in the three main state banks “as long as there is a need”.


Regulators can indirectly funnel more money into stocks by speeding up the approval of new funds, which are required to invest the bulk of the money they raise into the domestic market within certain period of time.

Mutual funds are forecast to be able to inject 60 billion yuan ($8.8 billion) into the market before October, either through newly approved funds or via new products, the Shanghai Securities News said on Wednesday.

Authorities approved three exchange traded funds for Chinese stocks and two domestic equity funds in recent days, other reports said.


Days after policymakers began talking about the need to “fine tune” the central bank’s loose stance in late July, investors began dumping stocks. The sheer amount of liquidity is not a concern but the flow apparently is.

New loans hit 7.37 trillion yuan in the first half of 2009, and some analysts estimate a fifth of that found its way into asset markets.

A central bank auction of three-month bills on Thursday produced a flat yield for the first time in eight weeks, and on Tuesday, the auction yield on one-year bills were flat as well. These auctions may reflect an end to a nearly two-month long rise in money market rates.


This would be a symbolic step since the tax rate is only 0.1 percent and applies to share sales not purchases. The tax on purchases was abolished last September as part of myriad measures to support markets. (Reporting by Kevin Plumberg; Editing by Jan Dahinten)