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By Pete Sweeney and Samuel Shen
SHANGHAI, June 30 (Reuters) - China’s efforts to stave off a crash in the world’s most volatile stock market showed signs of gaining traction on Tuesday, with the country’s main share benchmarks surging amid signs of intensifying government support.
Chinese equity markets have fallen more than 20 percent from their peak in mid-June, when a year-long rally fuelled by cheap money shuddered to a halt as a crackdown on leveraged stock trading triggered panic selling.
On Monday China’s main indexes had dropped a stomach-churning 7 percent before a sudden reversal. Tuesday began with another market tumble in early trade, before reversing course dramatically as the government scrambled to temper the sell-off.
“Chinese authorities wouldn’t want to trigger a meltdown which would spook investors and we may see more market stabilising measures on the way,” said Karine Hirn, Hong Kong-based partner of Swedish fund management group East Capital.
Beijing has already enacted a suite of measures that appear targeted at stabilising sentiment in a market dominated by individual retail investors prone to mood swings.
On the liquidity front, the central bank made multiple monetary easing moves last week and over the weekend, including cutting rates and reducing or eliminating banks’ reserve ratios.
Regulators also unveiled rules to let local government pension funds buy stocks for the first time, potentially channelling hundreds of billions of yuan into the sagging equity market.
But it appeared to be signs of direct government support to the market, combined with rumours of other behind-the-scenes “window guidance” to institutional investors, that triggered a sharp rebound on Tuesday afternoon.
Intensive subscriptions were seen on Monday for four major exchanged traded funds in Shanghai - China AMC 50 ETF , Huatai-PB CSI300 ETF, China AMC CSI300 ETF and Hua An Shanghai 180 ETF, fuelling speculation that the surge of money into ETFs was in fact coming from government coffers.
The CSI300 index ended up 6.7 percent on Tuesday, while the Shanghai Composite Index jumped 5.6 percent.
The Asset Management Association of China, a state-run body, joined the chorus of soothing official commentary heard in recent days, saying that falling prices presented a valuable buying opportunity for “rational investors”.
“Confidence is more important than gold,” the industry body said on Tuesday. “As long as we stick to the philosophy of rational investment ... sunshine will follow rainy days.”
Some market players agreed that recent market falls were a healthy pullback after a long rally.
“Valuations of blue chips are now very reasonable,” said Jiang Jinzhi, head of Greenwoods Asset Management Co.
“We believe those excessively leveraged speculators have already learned a good lesson. At the current level, we’re positive and optimistic about the market.”
But Chinese many investors have grown used to consoling government rhetoric, as well as buying from state-backed institutions signalling support, and past experience has showed such forced rallies can have limited durations.
“The lesson from China’s last equity bubble is that, once sentiment has soured, policy interventions aimed at shoring up prices have only a short-lived effect,” wrote Mark Williams, economist at Capital Economics, in a research note.
That view was echoed by Hong Hao, chief strategist with BOCOM International, who cast doubt on the effectiveness of government support as leveraged stock purchases are concentrated in small-caps, rather than blue chips.
“At this level, stocks are not cheap,” he said. “The simultaneous cuts in rates and banks’ reserve ratios were very strong stimulus. Since that didn’t stop the sell-off, then the market wonders what else the policy makers have up in their sleeves.”
Some worry that if China is forced to rely on monetary policy to prop up the stock market, it risks not having much firepower left to fight off other economic shocks, in particular a collapse in European demand as a result of a Greek exit from the euro zone.
Huang Sheng, an influential Chinese investor, said it was a “gave mistake” to rescue the market at this stage.
“Any attempt to rescue the market now will not be successful, and will only lead to bigger volatility in the future,” Huang wrote in his blog. “This is erroneous because any such moves imply the stock market is kidnapping the government.” (Editing by Alex Richardson)