China Seeks Brokerage Support for Crashing Stocks

The Chinese government is demanding brokerages use their own money to help prop up the falling stock market with new requirements for stock buybacks.

The China Securities Regulatory Commission met with 50 stock brokerages over the weekend, and asked that brokerages begin buying shares from clients to limit selling pressure. In total, the CSRC is asking brokerages to buy up to 10% of the total value of the Chinese stock market.

The Chinese government is demanding brokerages use their own money to help prop up the falling stock market with new requirements for stock buybacks.

The China Securities Regulatory Commission met with 50 stock brokerages over the weekend, and asked that brokerages begin buying shares from clients to limit selling pressure. In total, the CSRC is asking brokerages to buy up to 10% of the total value of the Chinese stock market.

The news did not help Chinese stocks, as the Shanghai Composite Index fell another 2.6% in morning trading, leading losses across Asia. The Hang Seng is also lower, while Japan’s Nikkei 225 has fallen 1.8% despite a quantitative easing program designed to boost asset values in the country.

Much of Japan’s market is falling on the stronger yen, with Tokyo Motor Corporation losing over 2% of its value due to the strengthening yen, which has risen to 121 to the USD. The yen remains 20% weaker than it was in 2013 and 2014, when it remained around 100 to USD, and is 50% weaker than in 2011 and 2012. The country’s sliding currency has failed to boost exports in the long-term, so investors are particularly concerned that a reversal of the trend could make things even worse for Japanese firms.

Support Uncertainty

With increasing volatility across Asia, many foreign analysts are looking to regulations and intervention to either create stability or establish a clearer trend. Japan’s quantitative easing has become a template for other Asian countries as they see downward shifts in growth. China has already cut interest rates several times over the last 10 months, and a recent decision to cut reserve requirements for banks has improved liquidity but it has not helped the stock market.

For Chinese equities, some analysts believe further declines are likely as more intervention looks like ineffective desperation. A recent report that China has detained some executives for insider trading caused Citic Securities to fall by nearly 7% during trading, and failed to help the market’s broader slide.

Additionally, a state-sponsored purchase of stocks through state-linked funds has led to more confusion and less conviction about China’s plans to save its equities market. However, some stabilization came last week after the market plunged 25% in a little over a week. The market has since recovered with a 7% gain, but remains 38% below its highest point in mid-June.

In China, stocks remain the domain of independent brokerages, which coordinate trades for the market. Investment banks largely limit their operations to credit, bonds, and non-equity assets. The government has not yet extended requests to the investment-banking world to prop up its stock market.