The long-standing assumption that the Chinese authorities know what they are doing has been shattered as the nation's shares fell on Tuesday, as Beijing scrambled once again to prop up a stock market whose wild gyrations have heightened fears about the financial stability of the world's second biggest economy.
After a plunge of more than 8 percent in major indexes on Monday, Chinese regulators said on Tuesday they were investigating share "dumping" incidents.
Earlier the China Securities and Regulatory Commission (CSRC) had said it was prepared to buy shares to stabilize the stock market, while the central bank injected cash into money markets and hinted at further monetary easing.
Despite those moves, aimed at bolstering the confidence of the ordinary investors who dominate China's equity markets, the Shanghai Composite Index fell 1.7 percent on Tuesday, while the CSI300 index of the largest listed companies in Shanghai and Shenzhen dipped 0.2 percent.
A highly volatile day — not unusual in China's unruly stock markets — had seen both indexes lurching between losses as deep as 5 percent and gains of more than 1 percent.
The violence of the moves unnerved investors worldwide, stirring fears that the Communist Party may be losing control after stoking a series of epic bubbles in property, corporate investment and equities to keep up the blistering pace of economic growth, the UK Telegraph reported.
Mark Williams, chief Asia strategist at Capital Economics, told the Telegraph that Chinese authorities appear to have been testing the waters to see what would happen if they stopped intervening. The market verdict was swift and brutal, the Telegraph reported.
“They have got themselves into a very difficult situation. They have put a lot of credibility on the line to shore up prices and this credibility has been badly damaged,” he said.
Western banks say they are coming under heavy pressure from Chinese officials to refrain from negative comments. They are effectively gagged if they wish to do business in China.
“Large parts of the market are closed, and those stocks that are still trading are selling off regardless of support measures. Clearly something very serious is happening,” said one economist.
"Retail investors' confidence in the mainland market is very weak," said Steven Leung, a director from UOB Kay Hian in Hong Kong.
Monday's dramatic slide shattered three weeks of relative calm for Chinese equities, secured through heavy government intervention in which authorities pumped liquidity into the market while effectively barring many investors from selling.
The rapid sell-off, which saw China's major indexes suffer their biggest one-day loss in more than eight years, may have been partly due to authorities testing the water for withdrawing some of that heavy-handed support.
Three people in the banking industry with direct knowledge told Reuters on Monday that the state-run margin lender had returned ahead of schedule some of the funds it borrowed from commercial banks to stabilize the stock market.
"The authorities picked an inopportune time to float a trial balloon about scaling back market support operations," wrote Tim Condon, head of research Asia for ING Bank in Singapore, in a note on Tuesday.
"Lesson learned: sentiment manifestly remains fragile."
The wild volatility in China's markets has stoked fears among global investors about the broader health of the Chinese economy, and sent Asian investors scurrying on Tuesday for safe-haven assets such as government bonds and the Japanese yen.
While economists at Nomura said China's economy was "far from being in a crisis scenario," they said shaken investors could cut back on spending and investment, which could impede a broader recovery that had been expected in the second half of the year.
Market watchers also fear that some companies may be facing heavy losses after speculating in stocks, although the overall amount of leverage is hard to quantify.
Still, Nomura said the sell-off "should only have a limited negative impact on the real economy."
But the renewed turbulence has raised questions about the long-term viability of Beijing's strategy of intervening to control its markets.
"Monday's plunge showed the Chinese authorities that even governmental measures have their limits," said Bernard Aw, market strategist at IG in Singapore. "It's anybody's guess what else they can do to shore up market sentiments.
Despite a slowing economy, China's main stock indexes had more than doubled over the year to mid-June, when a sudden swoon that wiped out as much as $4 trillion in stock market capitalization in a matter of weeks.
Markets finally began stabilizing in the second week of July after a barrage of official support measures. China's central bank cut interest rates, brokerages formed stabilization funds and regulators lifted restrictions on pensions and insurers investing in stocks.
Much of the gains since then have been given up in recent days, with Chinese shares now down around 30 percent from their mid-June peak.
After a series of crackdowns on "malicious" short selling, and an earlier ban on shareholders with large stakes from selling, China's regulator said on Tuesday it was investigating share "dumping," without offering details.
"The CSRC has already set up an inspection and enforcement force, specifically focused on examining clues about concentrated dumping of shares on the 27th," spokesman Zhang Xiaojun was quoted as saying in a question-and-answer transcript posted on its website.
The People's Bank of China had earlier said it would inject 50 billion yuan ($8.05 billion) into money markets in its biggest liquidity boost since July 7, near the trough of the last market sell-off.
The central bank also said that it would use "various monetary tools" to maintain "appropriate levels of liquidity," a signal that the further monetary easing that many analysts have predicted could be in store.
China's top economic planner described the stock market turbulence as "abnormal," but said it was optimistic on the outlook for the economy in the second half of the year.
"The fundamentals of China's economy are stabilizing and turning better," Li Pumin, secretary general of the National Development and Reform Commission, told a briefing in Beijing.
"So we have the foundation and necessary means to keep the healthy development of capital market including the stock market."
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