China readies US$483B bazooka to end selloff

China has created what amounts to a state-run margin trader with US$483 billion of firepower, its latest effort to end a stock-market rout that threatens to drag down economic growth and erode confidence in President Xi Jinping’s government.

China Securities Finance Corp. can access as much as 3 trillion yuan of borrowed funds from sources including the central bank and commercial lenders, according to people familiar with the matter. The money may be used to buy shares and provide liquidity to brokerages, the people said, asking not to be named because the information wasn’t public.

While it’s unclear how much CSF will ultimately deploy into China’s US$6.6 trillion equity market, the financing is up to 25 times bigger than the market support fund started by Chinese brokerages earlier this month. That’s probably enough to restore confidence among China’s 90 million individual investors, says Bocom International Holdings Co. The Shanghai composite index jumped 3.5 per cent on Friday, capping a two-week rally that’s turned it into one of the world’s best-performing equity gauges.

“It doesn’t have to use up all the money, as long as it can make the rest of the market believe that it has enough ammunition,” said Hao Hong, a China strategist at Bocom International in Hong Kong. “It is a game of chicken. For now, it seems to be working.”

CSF, founded in 2011 to pro- vide funding to the margintrading businesses of Chinese brokerages, has transformed into one of the key vehicles for the nation’s stock-market rescue package. At 3 trillion yuan, its funding would be about five times bigger than the new proposed bailout for Greece and exceed China’s 2.3 trillion yuan of regulated margin finance during the height of the stock-market boom in June.

Chinese policy-makers have gone to unprecedented lengths to put a floor under the market as they seek to bolster consumer confidence and prevent soured loans backed by equities from infecting the financial system. Over the past few weeks, they’ve banned large shareholders from selling stakes, ordered state-run institutions to buy shares and let more than half of the companies on mainland exchanges halt trading.

China isn’t the only market with a history of intervention. America’s Congress authorized US$700 billion for the so-called TARP program in 2008 to help re-capitalize the nation’s banking system. It also granted the government power to take over mortgage-finance companies Fannie Mae and Freddie Mac, an authority that thenU.S. treasury secretary Henry Paulson equated to having a “bazooka.”

While the measures in China have helped support stock prices, critics say intervention undermines the country’s pledge to increase the role of markets in the world’s second-largest economy. Money managers including Standard Life Investments and Aberdeen Asset Management have warned that government meddling threatens to further delay the entry of mainland stocks into MSCI Inc.’s global benchmark indexes.

“The downside of the government’s recent aggressive moves is that it’s moving backward in terms of market liberalization,” said Chen Xingyu, a Shanghai-based analyst at Phillip Securities Research. “It’s creating moral hazard in the market as investors are reassured that the government will step in.”

One of the biggest hurdles to sustaining gains in Chinese shares may be that they’re simply too expensive given the nation’s slowing economic growth. The median trailing price-to-earnings ratio on mainland bourses is 66, higher than in any of the world’s 10 largest markets. Concern that valuations are still too rich helped fuel a record stretch of foreign outflows via the Shanghai-Hong Kong exchange link over the nine days ended Thursday.

For Chen Gang, the chief investment officer at Shanghai Heqi Tongyi Asset Management Co., the CSF funding buys time for policy-makers to put the market on more solid footing by reducing the use of unregulated margin finance. Eventually, it will convince mainland investors to put cash back into stocks, he said.

“Once the confidence is back, money that’s staying on the sidelines will start to trickle in,” Chen said. “I would say there’s no battle that the Chinese government can’ t win.”

It is a game of chicken. For now, it seems to be working