In their latest attempt to prevent the country's roller-coaster sharemarket from sliding deeper into bear market sentiment, China's securities regulators have made a series of announcements late on Wednesday relaxing margin trading rules.
The extreme volatility in China's $10 trillion markets has resulted in the extraordinary year-long bull run snapping into bear territory in the space of a fortnight, and has sent authorities including the Chinese central bank scrambling to avert a crash.
Daily swings of 5 per cent or more have become the norm for the benchmark Shanghai Composite Index and the even more volatile Shenzhen bourse, despite a 10 per cent "limit-down" cap on how far an individual stock can rise or fall within a day's trade.
After losing more than 22 per cent in the past two weeks, Shanghai's gain for the year has been pared back to about 25 per cent.
The fluctuations have been so wild that a strong intra-day rally on Tuesday had some wags pointing out that another bull run – typically defined by swings of 20 per cent – was theoretically in touching distance if the trend persisted for a couple more days. It didn't.
Others, only half-jokingly, suggested they'd be better off taking their money to the gaming enclave of Macau.
Markets around the world trade heavily on sentiment, but nowhere else is this truer than in China, where stock valuations have long been detached from broader economic fundamentals.
When China's rate of economic growth was roaring in the double digits, its shares remained in the doldrums, while the remarkable sharemarket gains of the past 18 months came as China's GDP slowed to its lowest rate of growth since the 1980s.
A key reason has been the shift of individual investors away from real estate, and astronomical growth in property prices stoking fears of a bubble.
In China, particularly in larger cities, share trading has become a national pastime, driven by a dominant sentiment that the sharemarket surge has been inherently government backed, and that anyone who hasn't the caught the wave would have been stupid to have missed out.
However, for investors who have been accustomed to the rapid accumulation of wealth, the zest for market speculation far outweighs any buy-and-hold mentality.
The volatility in China's markets is writ in the furious trading activity fuelled by heavy margin lending.
The World Federation of Exchanges shows the value of shares traded on the Shanghai exchange in recent months was greater than five times the market's total underlying value. That compares with less than one time the underlying value in Hong Kong's more international market.
On Wednesday, the China Securities Regulatory Commission said it would cancel a rule that required investors to make additional guarantees if the ratio of capital they borrowed from brokerages reached 130 per cent of warning levels, while also relaxing the minimum threshold amount investors needed to hold in accounts for margin trading.
The Shanghai and Shenzhen exchanges both announced they would lower transaction fees by 30 per cent to further bolster sentiment.
It followed a two-pronged move by the People's Bank of China not seen since the height of the financial crisis.
On Saturday, the central bank announced a quarter of a percentage point interest rate cut coupled with the loosening of the capital reserve requirements for smaller banks.
The announcements on Wednesday would not "be enough to stabilise the market, although given the importance of sentiment, anything that improves sentiment will be a short-term positive", Simon Male, head of Asian equities sales at Auerbach Grayson, said.
"Making it easier to obtain margin financing is only exacerbating the problem. Without fundamental support, the market will remain extremely volatile."
With Bloomberg
