China directs State Banks to buy stocks

Sahana Kiran
Source – Unsplash

While the rest of the globe was bidding farewell to the deadly pandemic, China continued to impose lockdowns that seemed to have taken a toll on its economy. In addition to this, the country’s property market which has been a core driver of its economy also took a hit. The Chinese stock market followed suit. Now, to prevent excessive selling, the government has ordered state banks to purchase stocks.

According to the Consul General of China in Belfast, Zhang Meifang, the reason behind this was to stabilize the foreign exchange market. Bolstering macro management was also part of this move. She noted that the foreign exchange risk reserve ratio for foreign exchange forwards trading would surge from 0 to 20 percent in the next two days.

The Chinese government official took to Twitter to make the announcement.

This certainly did not settle well with the community. Several took to Twitter to note how China’s central bank was formulating an artificial bottom to the market. One Twitter user also suggested that the country could witness unrest due to the central bank’s move.

It should be noted that this wasn’t China’s first move to fix its markets artificially. The government recently announced that the China Construction Bank would set up a $4.2 billion fund to purchase real estate properties from developers. This was in light of its depleting housing market.

Will China witness a turnover?

Recent reports from stock analysts brought about hope to many, however, the Chinese government seemed to be heading in another direction.

Xun Yugen, a strategist at Haitong Securities believed that the market was much better than what it used to be a couple of months ago, Yugen added,

“The current economic scenario is better than the end of April. The risk premium is now close to what it was in April. That means the market has largely digested the risks.”

Additionally, a fund manager at Huichen Asset Management in Shanghai, Dai Ming noted how buying power should surge for stocks to be up. The Chinese government could be abiding by this in order to spruce up its stock market. Ming added,

“For stocks to be up, you will need buying power that is often accompanied by rising trading volumes. For that to take place, the market will need to see some changes of the fundamentals.”

Taking a leaf from the books of the past, Yi Bin an analyst at Western Securities suggested that the market could see respite post the holiday. Yi stated,

“Given the historical experience over the past decade, the markets are prone for tight liquidity and the shrinkage in trading volume.”