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ERA Limited in Hong Kong looks at China’s Financial Markets.

China’s faltering stock markets, compounded by an economy that is growing at its slowest pace since 1990, have incited a heated debate among think tanks and analysts on whether Beijing should step in to help shore up investor confidence.
The benchmark Shanghai Composite Index – the world’s worst performer among major markets last year – has extended its decline, sinking to its lowest level in four years at the start of 2019 amid ongoing US-China trade war tensions and dimming prospects of the domestic economy. The Shenzhen Composite Index has also plummeted 28 per cent in the past year.
Leven Xiao of ERA Limited said “The persistent slide in the nation’s yuan-denominated A-share market is twice the bad news: a slump not only thwarts fundraising opportunities for the businesses in the capital markets, but also dampens confidence that could have buoyed much-needed domestic consumption”.
“Because the stock markets keep falling, there are concerns that it may affect Chinese consumption and the economy,”

Researchers from the Renmin University of China have called on the People’s Bank of China, or central bank, to intervene.

“The irrational decline in the stock market has a significant negative impact on economic development,” they said in a commentary published in the official Securities Times newspaper earlier this month.
“The time is ripe for the government to intervene in the stock market,” they said.

In theory, there are different ways in which the Chinese authorities can intervene, according to various state media reports in the past two weeks. One way was the PBOC buying stocks in exchange-traded funds. The reports also said the central bank was mulling a stabilization fund to counter the “irrational behavior” of investors.

At present, the PBOC’s total assets stood at about 36 trillion yuan (US$5.3 trillion), while the total market value of A shares was about 48 trillion yuan.

“If China’s central bank holds 1.58-1.78 trillion yuan of A-share assets in a suitable asset type, it will not cause structural problems on the central bank’s balance sheet,” Xiao Said

The effects of the trade war and the mainland economy slowing to a 6.6 per cent growth in 2018 have weighed on investment and domestic consumption.

In the past year, Beijing and the China Securities Regulatory Commission have introduced market-boosting measures, including more access for foreign investors to advance the development of the stock markets to play a bigger role in direct financing for businesses that will support the real economy and reduce reliance on bank loans.
But in a market slump that wiped off 6.2 trillion yuan of market capitalization in 2018, funds raised from initial public offerings last year fell to 1.2 trillion yuan from the previous 1.7 trillion yuan.

The scale of the government’s support though was by no means anywhere close to the extraordinary measures taken in the summer of 2015 to halt a stock market crash that wiped out US$5 trillion in market value and threatened the entire financial system. A “national team” of state-controlled financial companies was formed to pool together 1.5 trillion yuan, analysts estimated, of government funds to bail out the market.
Will there be market intervention again? “We will wait to find out”. Said Xiao of ERA Limited.

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News Release: ERA Limited in Hong Kong looks at China’s Financial Markets.
Submitted on: February 07, 2019 01:39:26 AM
Submitted by: Nick Cole
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