China weighs stock market rescue package backed by $278 billion

Chinese authorities are considering a package of measures to stabilize the slumping stock market, according to people familiar with the matter, after earlier attempts to restore investor confidence fell short and prompted Premier Li Qiang to call for “forceful” steps.
Policymakers are seeking to mobilize about 2 trillion yuan ($278 billion), mainly from the offshore accounts of Chinese state-owned enterprises, as part of a stabilization fund to buy shares onshore through the Hong Kong exchange link, said the people, asking not to be identified discussing a private matter. They have also earmarked at least 300 billion yuan of local funds to invest in onshore shares through China Securities Finance Corp. or Central Huijin Investment Ltd., the people said.
Officials are also weighing other options and may announce some of them as soon as this week if approved by the top leadership, the people said. The plans are still subject to change. The China Securities Regulatory Commission didn’t respond to a request for comment.

The deliberations underscore the elevated sense of urgency among Chinese authorities to stem a selloff that sent the benchmark CSI 300 Index to a five-year low this week. Calming the nation’s retail investors, many of whom have been bruised by the protracted property downturn, is also seen as key to maintaining social stability.

Whether such measures will be enough to end the rout is far from certain. The property crisis, depressed consumer sentiment, tumbling foreign investment and diminished confidence among local businesses after years of volatile policymaking are exerting strong downward pressure on both the economy and financial markets.

Past efforts to shore up the stock market, most notably in 2015, proved insufficient at best and at times counterproductive. Authorities have also been reluctant to roll out major economic stimulus of the sort that many equity investors have called for.

At a State Council meeting on Monday, chaired by Li, China’s cabinet received a briefing on the operations of the capital markets as well as considerations for related work, according to an official statement, which didn’t provide more details on what Beijing is mulling.

“It sounds like something had been readied in response to the recent equity rout,” said Neo Wang, managing director for China research at Evercore ISI in New York. “The market was poor enough to warrant such elevated attention — China cannot afford to see A-shares sinking toward the Lunar New Year holidays,” he said, referring to domestically listed Chinese stocks and the upcoming mid-February break.

In all, more than $6 trillion has been wiped out from the market value of Chinese and Hong Kong stocks since a peak reached in 2021, underscoring the challenge that Beijing faces as it seeks to arrest a decline in investor confidence.

China’s piecemeal moves in recent months to boost market sentiment were met with a large degree of despondency from traders, with some calling for more forceful stimulus. Beijing has restricted short selling and state funds stepped in to buy shares of big banks. The formation of a state-backed stabilization fund has been contemplated since at least October, though some raised doubts over its efficacy.

Confidence in China’s markets has been hurt over the past years by President Xi Jinping’s growing control over private enterprise, which has included a crackdown on the country’s tech giants. International banks who were planning a massive expansion in the country are now tempering their ambitions to build platforms in the world’s second-largest economy.

During the 2015 rout, Beijing tapped China Securities Finance Corp. as its main stabilization vehicle by allowing it to access as much as 3 trillion yuan of borrowed funds from sources including the central bank and commercial lenders. The money was used to buy stocks directly and provide liquidity to brokerages. Even so, the turbulence didn’t end until a year later.

This time, officials are seeking to use offshore money to minimize impact on an already weakening yuan, said the people.

China’s stock meltdown is adding pressure on so-called snowball derivatives, which are structured products that promise bond-like coupons as long as the underlying assets trade within a certain range. The CSI Smallcap 500 Index, a pricing reference for some of these products, slipped 4.7% on Monday, taking it below an earlier estimated threshold that may trigger widespread losses on the snowballs.

The nation’s largest brokerage Citic Securities Co. last week stopped short selling services for some clients after so-called window-guidance from regulators, Bloomberg has reported.

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