Regulators advice firms on Chinese market condition

2 September,, Lagos – More bad economic data from China as Chinese PMI data released last night came in at 49.7 in line with expectations. This marks a three year low, depicting contraction with this being the first reading 50 since February, adding pressure to the Chinese market condition.

Some traders have again tried to write this off as a temporary hitch, justifiable by the fact that factories near Beijing have been closed for weeks in order to clean up the pollution ahead of the Thursday military parade. Therefore, believing that the September numbers will come out stronger. This ideology supports the sentiment to go long China for the early part of this week because of the enormous military parades on Thursday celebrating the end of World War II, or at least China’s war with Japan as markets will be in China Thursday and Friday.

On the contrary, the Shanghai Composite ended down 1.2 percent, and the Shenzhen fell 4.6 percent. The continuous decline of the stock market has inspired four regulatory agencies to issue a joint statement “encouraging” listed companies to take action, in a bid to prop up their shares. These suggestions include:

  • Pay dividends, which very few Chinese companies do.
  • Buy back more shares. They will provide tax breaks to help do that.
  • Do more mergers. State-owned banks will be encouraged provide loans to companies to do those mergers and acquisitions.
  • Do more restructuring.

Companies are left with the option of doing something to support their shares as government has clarified that it will not be buying more shares in the open market, at least for now. Having spent over $200 billion to prop up the market since July, the government is taking a break from further market intervention. Also, the government is long a lot of shares; their investments are now well under water. Further more, the authorities are now investigating and arresting individuals on suspicion of manipulating the market, including, apparently, the head of London’s Man Group, one of the largest hedge funds in the world.

The situation presents a dilemma to investors as short selling is prohibited, hence staying long is the only available option. So much for the “the new open market system.”

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