October 18, 2018 / 3:24 AM / a month ago

Breakingviews - China’s wink at punters hints at intervention

People's Bank of China Deputy Governor Yi Gang attends a conference during the 2016 IIF G20 Conference at the financial district of Pudong in Shanghai, China, February 25, 2016. REUTERS/Aly Song

HONG KONG (Reuters Breakingviews) - China’s winks at punters hint at intervention. Top officials have been trotted out over recent days to reassure investors fretting over a near-25 percent stock slump this year. A thaw is not far away, they say; an aggressive deleveraging campaign is on hold too. That’s all in Beijing’s playbook. If markets keep falling, more active policy support comes next.

China’s central bank governor, Yi Gang, said over the weekend that policymakers have “plenty of room for adjustment” in monetary policy. He had earlier told the financial publication Caixin that while officials have long talked about the need to reduce debt in the economy – an effort which has probably hit Chinese asset values harder than U.S. tariffs – they now think the problem has stabilised.

Liu Shiyu, the top securities regulator, also told a meeting of investors that their legal “rights and interests” would be protected. One publication quoted him as saying that “spring” was not far off – a nod to those considering a return to the stock market.

Their placatory tone follows a particularly steep sell-off in the first half of the month, when the Shanghai Composite Index dropped nearly 9 percent. It is also the most authoritative sign yet that the crusade against debt is, at least in theory, on pause – a “significant change”, Yi said.

Chinese investors are accustomed to occasional nudges from regulators. But what happens next, in concrete policy terms, matters more. Back in 2015, these included the setting up of a so-called “national team” of state-backed capital to support equity prices, probing institutional investors for “malicious shorting”, and unwritten commands not to sell shares.

So far, they have largely avoided these more dramatic steps, perhaps in part because the sell-off is still not that bad. The benchmark Shanghai Composite Index nearly halved from peak to trough in 2015 to 2016, while it is now down roughly a quarter from the start of the year.

There are still worries though, including the impact of margin calls on loans made against shares whose value is falling fast. The steady drip of reports – including news that local governments plan to provide ill-defined “support” to listed companies – suggests stronger medicine may be coming. Official pep talk is rarely enough.

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