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Chinese leadership in question as measures to curb market fall proves ineffective

Date 07-July-2015
Subject Chinese leadership in question as measures to curb market fall proves ineffective

HONG KONG : For three years, President Xi Jinping of China has crushed opposition by silencing and often locking up anyone who dares defy the government. But that aura of invincibility has been shaken by stock market speculators who have made a mockery of efforts to halt the slide in share prices.

The losses - Chinese shares have shed more than a quarter of their value in three weeks - pose an added risk, and possibly greater danger, to a global economy grappling with Greece's difficulties in repaying foreign loans and its possible exit from the euro. About $2.7 trillion in value has evaporated since the Chinese stock market peaked on June 12. That is six times Greece's entire foreign debt, or 11 years of Greece's economic output.

Sceptical investors have so far shrugged off each step the government has taken to keep share prices aloft: an interest-rate cut, threats to punish rumourmongers, allowing the national pension fund to buy stocks and even plans to investigate short-sellers.

Halo Dented

The faltering of these measures has put an embarrassing dent in the halo of unruffled supremacy built up around Xi's administration, and this past weekend his government doubled down again, betting that it could beat bearish market sentiment into submission.

The government rolled out further initiatives in hopes of forestalling another market rout on Monday: 21 brokerage firms agreed on Saturday to set up a fund worth at least $19.4 billion to buy blue-chip stocks, and both of the country's stock exchanges halted all new initial public offerings.

On Sunday, the government brought in the People's Bank of China, and an investment arm of the country's sovereign wealth fund to support the effort.

The China Securities Regulatory Commission, which governs the stock markets, said that the central bank would give financial support to the state-controlled China Securities Finance Corp. to "enhance its capacity to safeguard market stability." The finance corporation lends to brokerage firms, which then lend the money to customers wanting to buy shares.

In addition, Central Huijin Investment, a company owned by the country's sovereign wealth fund that usually invests in banks and other financial institutions, said on its website that it had recently bought into investment funds traded on the stock exchanges and would continue to play a role in "market operations."

The Chinese stock market's plunge "is probably the most public and obvious instance where the government's omnipotence has been challenged," said Victor Shih, an associate professor at the University of California, San Diego, who studies the politics of financial policy making in China.

A plunge in consumer confidence could deliver a shock to a Chinese economy that is already slowing, as the real estate market has struggled to cope with millions of new but empty apartments and as hundreds of thousands of export- oriented factories face tepid overseas demand. And with China now the world's dominant market for commodities and the fastest-growing buyer of exports from manufacturing giants like Germany, the nosedive in China's markets could hurt economic growth around the world.

Three Ripples

It could also have political ramifications. Harry Harding, a specialist in Chinese politics who is a visiting professor at the Hong Kong University of Science and Technology, said the plunge in the stock market could produce three successive ripples. The first would consist of investment losses for households, the second would lie in slower economic growth and the last would be a political backlash against Xi and his team.

Unlike his predecessor, Hu Jintao, Xi has taken direct control of economic policymaking. He and the premier, Li Keqiang, the country's second-ranking official, have been mute on the stock market's difficulties. Xi has also been unafraid of making enemies with an unrelenting anti-corruption campaign.

The effects are already being felt in homes across China. Individual investors own four-fifths of China's stocks, a far higher proportion than in Western markets, where institutional investors predominate. Chinese investors have 112 million accounts on the Shanghai stock market and 142 million accounts on the Shenzhen stock market. Investors with heavy losses include He Wuhong, a Beijing middle school teacher and mother of a toddler.

She and her husband invested nearly all of their $65,000 in savings in China's stock market in late April and early May, only to see their account's value fall by almost half in recent days. "My heart can't take it," she said. "We would probably sell off our holdings as soon as the market rebounds enough to make us even."

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