Chinese Brokers Planned $19 Billion Fund to Avert Stock Market

Various Chinese brokerage firms are coming together to help avert stock market declination after the nation experience its biggest three weeks drop in stock history since 1992.

The 21 top brokers planned to invest 15 percent of their assets which is estimated to worth 120 billion yuan ($19.3 billion) in total, said the Security Association of China on its website.

The fund will focus on blue-chip exchange traded funds since small-cap stocks has lost 33 percent of its early profit. The move is to help margin traders from unwinding positions after every measure failed, with the market losing $2.8 trillion in three weeks, margin traders are losing their capital at a record pace and it’s a matter of time before funds start filing for bankruptcy.

According to Hao Hong, China equity strategist at Bocom International Holdings Co. in Hong Kong, “This 120 billion yuan won’t last an hour in this market, it might help blue-chip stocks, as investors may value them more but the bursting of the bubble in small-cap/tech stocks is likely to continue”

Last week the People’s Bank of China cut interest rates and eased margin-trading rules by cutting trading fees to help traders with their open positions.

Small-Cap Stocks

Early last month ChiNext index of smaller companies was trading at a record high, five times the level of Shanghai Composite Index. Since June 3 peak ChiNext index has lost 33 percent, reducing this year gain to 77 percent.

“The market’s most acute concern is still these smaller cap stocks, as investors levered up to buy them and now margin lending curbs hit them the hardest,” Hong said. “With their valuation in the stratosphere, nobody is willing to step in and bolster these stocks.” Bloomberg

The brokers said as long as the Shanghai Composite Index stays below 4,500 they will not reduce their proprietary investments in equity market, said the association on Saturday. The Shanghai Composite Index closed at 3,686.92 on Friday. It is believe that listed brokers will aggressively buy back shares, while encouraging their parent companies to do the same.

The 21 brokers coming together said “the economic fundamental that had justified the stock market’s rally before the rout hadn’t changed. Therefore, it is our duty to unite in stabilizing this market”

Li-Gang Liu, chief China economist for the Australia & New Zealand Banking Group Ltd., said the market would eventually find its own level.

“If a listed company thinks its shares are undervalued it could buy back shares. Such purchases shouldn’t be triggered by any kinds of administrative calls,” he said. “I believe the market is still under big downward pressure.