State aid to brokerages promising to buy stocks seen as test case for buffer fund
China’s stock market regulators are likely to create a buffer fund to help the government intervene in the market during times of turmoil such as the mass sell-off of stocks that has sent prices plummeting by around 30 percent over the past month, local news media report.
The fund, called a stabilization fund, would allow the government to move faster to prop up stocks during market crashes and would serve to ‘legitimize’ state involvement in stock markets, China Daily reports, citing Wang Changhe, a China Securities Regulatory Commission (CSRC) official.
The fund would be created along with what Wang calls ‘safe harbor’ rules that exempt the government from accusations of market manipulation or insider trading as a result of using the fund, the newspaper reports. He also says the government is likely to create the buffer fund as an addendum to regulations the CSRC announced on Sunday intended to prevent people from trading stocks under false names.
Shi Jianzhong, deputy head of the China Law Society’s Institute of Economic Law, says in an interview with China Daily that the fund could represent a setback for Chinese markets, as it could ‘create in investors the dependence and anticipation that it will come to the rescue whenever the market fluctuates.’
Liu Zhiqin, the chief representative of the Beijing office of Zurich Cantonal Bank, writes on the China.org.cn news site that the government’s support for stocks in recent weeks – in the form of cash assistance to brokerages that promised to buy shares – may have served as a test case for the buffer fund.
Earlier this month, the government gave aid to 21 companies that promised to buy a combined 120 bn yuan ($19 bn) in stocks and hold them for at least a year. The measure was part of a package that included a ban on major shareholders selling their stakes, interest rate cuts, lower reserve requirements and permission to suspend more than half the stocks in the country from trading during the ongoing volatility.
