Can China save its market from the bears?

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As the People's Bank of China (PBoC) latest attempt to stem the violent downdraft in mainland equities proves futile, investors say authorities still have a few levers left to pull but no guarantee they will rescue the market from its swoon.

The country's stock market dropped into bear market territory on Monday, after its 3 percent-plus plunge left it more than 20 percent down from its June 12 peak. This most recent leg down comes after the central bank surprised the markets with aggressive monetary easing – cutting both interest rates and the reserve requirement ratio (RRR) for select banks over the weekend.

"There have been numerous rumors circulating of alternative steps policymakers could take to shore up the market," Mark Williams, chief Asia economist at Capital Economics, wrote in a note.

"These include authorizing the government pension funds to buy equities, or ordering [state-owned investment firm] Central Huijin or other government-owned entities to do the same. The prospect of a temporary halt to IPOs [initial public offerings] has been discussed," he said.

Indeed, there is also the prospect of further monetary stimulus, Williams said.

"There is plenty of room to cut benchmark interest rates further. But People's Bank officials may baulk at expending too much monetary policy ammunition in an effort to support markets, particularly if the spillover from a market slump to the economy outside the financial sector is limited."

Will the levers work?

Of all the rumored measures, increased investment by Central Huijin into the stock market would be the fastest way to turn around investor confidence, according to Tommy Xie, economist at OCBC Bank.

"People were speculating that there were large buying orders from Central Huijin on Monday," he told CNBC.

If true, it would signal two things, says Xie: "First, that the government is serious about defending the market. Second, that the government doesn't just talk up the market, they are buying up the market."

PBOC easing aimed at saving stocks? Not really: Pro
PBOC easing aimed at saving stocks? Not really: Pro   

Huijin, a unit of China's $653 billion sovereign wealth fund China Investment Corporation, is a major shareholder in China's biggest banks, according to Reuters. It has periodically bought listed shares of Chinese commercial banks and other financial firms on the secondary market.

Boosting pension fund participation in the stock market would also provide a major lift to sentiment, says Xie. However, it would likely take up to 6 months before regulatory hurdles are cleared, he said.

According to draft regulations posted on the Ministry of Finance's website late Monday, China is preparing to allow pension funds managed by local governments to invest in the stock market for the first time. The pension funds would be able to invest up to 30 percent of their net assets in mainland stocks, equity funds and balanced funds.

Doubts remain

Capital Economics' Williams is skeptical that any such measures will be effective in the long-run

"The lesson from 2007 and 2008 is that such interventions can work, but only for a while," Williams said. Over the longer-term, they tend to have an adverse impact by encouraging investors to try to pre-empt policy actions rather than focus on the fundamentals of the firms they are investing in, he noted.

Evan Lucas, market strategist at IG shared a similar view.

"The trading situation that transpired yesterday clearly shows that once sentiment sours, policy interventions to shore up equities has a short lived effect, if any," he wrote in a note. "It begs the question what else policy makers can do? (Answer: not much)."