Investors nervously watch a stock trade board on Monday in Shanghai. The benchmark Shanghai Composite Index surged Monday morning following a weekend of emergency measures to shore up the slump. (Photo: Yang Hui/GT)
Time needed to restore investor confidence: analyst
Shanghai's benchmark stock index rebounded on Monday after a string of unprecedented government measures started to take effect, but there are still concerns over whether the rally can be sustained.
The benchmark Shanghai Composite Index opened up 7.82 percent on Monday, driven by State-owned oil companies and financial firms like PetroChina and Bank of China, but returned to negative territory around 1 pm before bouncing back to close 2.41 percent higher at 3775.91 points.
However, the smaller Shenzhen Component Index lost 1.39 percent. The ChiNext Index, which tracks China's NASDAQ-style board of growth enterprises, slumped 4.28 percent.
"The government's decision to inject money into the stock markets, mostly in blue-chip shares, has worked given today's market performance," Li Lifeng, an analyst with Sinolink Securities, told the Global Times Monday.
"The stock markets have shown sign of stabilization, but it will still take time to totally restore investor confidence," he said.
Mainland stock markets also outperformed other major markets amid concerns over Greece. Japan's Nikkei 225 Index dipped 2.08 percent on Monday. In Hong Kong, the benchmark Hang Seng Index dropped 3.2 percent, its steepest fall since May 2012.
Given the "No" vote in the Greek referendum and the latest developments in mainland stock markets, there may be increased volatility in Hong Kong's financial markets, the Hong Kong Monetary Authority said in a statement Monday, noting that it will provide liquidity support to the banking system when necessary.
Mainland authorities rolled out a series of measures over the weekend, including suspending the IPOs of 28 companies, approving the move of 21 big securities firms to purchase shares in big companies worth 120 billion yuan ($19.3 billion), and allowing brokerages in need of liquidity to borrow from the central bank.
The measures came after mainland stocks plunged by nearly 30 percent in the past three weeks as previous monetary easing measures, reduced stock transaction costs and relaxed rules on margin trading - which allows investors to borrow money to buy shares - failed to impress investors.
Analysts said the unprecedented move shows the government's determination to stabilize the stock markets, as continued dramatic falls will not only threaten financial security but also hurt economic growth and wipe out social wealth.
Market uncertainty
Market analysts are divided on how long the rally will last.
Analysts at Shenwan Hongyuan Securities said on Monday that the Shanghai index will fluctuate between 3,600 points and 4,500 points in the next three months.
Some economists remain concerned about the stock markets' performance once the effects of market stabilization measures diminish.
"These measures are meant as a short-term fix but can't address the fundamental problems facing China's equities and financial system," Liu Ligang, chief China economist at ANZ Banking Group, wrote in a research note on Monday.
Although the value of stocks in the main board has remained at a reasonable level, traded at 18 times their earnings on average, the ChiNext market is still being traded at around 100 times their earnings, Liu noted.
Analysts believe that if the current measures prove inadequate to prevent a market crash, more measures will likely be implemented to avoid a systemic financial market risk.
Stabilizing markets vital to reform
The bailout measures also raised fears that administrative intervention will hinder China's move toward financial reform and opening-up.
"These measures have a better chance to stop the market's downward spiral, but are a major setback to China's effort to build a market-based capital market platform," Credit Suisse said in a note on Monday.
But analysts said preventing a stock market crash is the government's most urgent task.
"In any country or market, it is natural for the government to bail out the stock market when there is great volatility. It is not a setback to marketization," Li Daxiao, director of research with Yingda Securities, told the Global Times.
Li said without taking action to stabilize the stock markets first, the market-oriented reform on the stock markets could fizzle.
A stable and sound development of its capital markets is crucial to China's ongoing reforms and industrial upgrade, because it serves as an important platform for emerging industries to get financing and State-owned enterprises to pilot mixed-ownership reforms, said Li Shaojun, an analyst with Minsheng Securities.
