China puts 6-month ban on big shareholders cutting stakes

Investors look at computer screens showing stock information at a brokerage house in Shanghai, China.
Aly Song | Reuters
Investors look at computer screens showing stock information at a brokerage house in Shanghai, China.

China's securities regulator took the drastic step of ordering shareholders with stakes of more than 5 percent from selling shares for the next six months in a bid to halt a plunge in stock prices that is starting to roil global financial markets.

The China Securities Regulatory Commission (CSRC) said on its website late on Wednesday that it would deal severely with any shareholders who violated the rule.

Separately, major shareholders of top Chinese banks including ICBC and companies including Sinopec pledged to either maintain their holdings or increase their stakes in the listed companies.

Cramer: How China's fall affects you
Cramer: How China's fall affects you   

The announcements came after China's stock market showed signs of seizing up on Wednesday, as companies scrambled to escape the rout by having their shares suspended and the CSRC warned of "panic sentiment" gripping investors.

The CSI300 index of the largest listed companies in Shanghai and Shenzhen closed down 6.8 percent on Wednesday, while the Shanghai Composite Index dropped 5.9 percent.

More than 30 per cent has been knocked off the value of Chinese shares since mid-June, and for some global investors the fear that China's market turmoil will destabilize the real economy is now a bigger risk than the crisis in Greece.

Indeed, the Obama administration is worried the stock market crash could get in the way of Beijing's economic reform agenda.

"The concern, that is a real one, is what does it mean about long-term growth in China," U.S. Treasury Secretary Jack Lew said on Wednesday at an event in Washington on financial stability.

"How do Chinese policymakers respond to this, and what does it mean in terms of core conditions of the economy?"

Trading halts

More than 500 China-listed companies announced trading halts on the Shanghai and Shenzhen exchanges on Wednesday, taking total suspensions to about 1,300 - 45 percent of the market or roughly $2.4 trillion worth of stock - as companies sought to sit out the carnage.

"I've never seen this kind of slump before. I don't think anyone has. Liquidity is totally depleted," said Du Changchun, an analyst at Northeast Securities.

"Originally, many wanted to hold blue chips. But since so many small caps are suspended from trading, the only way to reduce risk exposure is to sell blue chips."

Beijing, which has struggled for more than a week to bend the market to its will, unveiled yet another battery of measures and the People's Bank of China said it would step up support to brokerages enlisted to prop up shares.

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China's Finance Ministry and state investor Central Huijin Investment pledged not to reduce their shareholdings in the country's Big Four banks - Industrial and Commercial Bank of China (ICBC), China Construction Bank, Agricultural Bank of China and Bank of China.

Sinopec, Asia's largest oil refiner, said in a filing on Wednesday that its controlling shareholder Sinopec had increased its stake in the listed company by buying 46 million A shares in Shanghai, or 0.04 per cent of the total issued share capital.

Nevertheless, world stock indexes fell overnight and the yen jumped against the dollar on concerns over China's market mayhem and lingering worries over the future of Greece in the euro zone.

Challenge for XI

The plunge in China's previously booming stock markets, which had more than doubled in the year to mid-June, is a major headache for President Xi Jinping and China's top leaders, who are already grappling with slowing growth.

Beijing's interventionist response has also raised questions about its ability to enact market liberalization steps that are a centerpiece of its economic reform agenda.

China has orchestrated brokerages and fund managers to promise to buy billions of dollars' worth of stocks, helped by a state-backed margin finance company that the central bank pledged on Wednesday to provide sufficient liquidity.

The securities regulator said the Securities Finance had provided 260 billion yuan ($41.8 billion) to 21 brokerages, though that sum is only 40 percent of the amount of leveraged positions that investors have cut since June 18.

Unlike other major stock markets, which are dominated by professional money managers, retail investors account for around 85 percent of China trade, which exacerbates volatility.

Deng Ge, a CSRC spokesman, said in remarks posted on the regulator's official channel on Weibo, China's version of Twitter, that there had been a big increase in "irrational selling" of stocks.

"It's a stampede," added Wang Feng, chief executive officer and founder of hedge fund firm Alpha Squared Capital and a former Wall Street trader.

"And the problem of the market is that all the players move in the same direction, and are too emotional,"