New | The cost of China's market stability and how to pay for it
Questions grow over how China returns stability to equity markets as its 120 billion yuan stabilisation fund is just a fraction of the capitalisation of its markets and less than 10 per cent of the 1.4 trillion yuan in outstanding margin finance
The country's 120 billion yuan stock market stabilisation fund, paid for by the country's 21 biggest brokerages, is a fraction of the capitalisation of the country's 48 trillion yuan equity markets and less than 10 per cent of the 1.4 trillion yuan in outstanding margin finance.
While the People's Bank of China has pledged to provide the liquidity necessary to support the state-backed margin debt provider, China Securities Finance Corp, the amount required remains unspecified.
And though these moves - in addition to a raft of administrative controls that restrict stock sales by major shareholders and promises to extend and roll over margin debts that become due - may have delivered a semblance of stability over the final two trading days of last week, many market professionals believe more will have to be done in the weeks ahead.
Tim Condon, the head of Asia research at ING in Singapore, reckons that the scale of the stock market rout puts the government roughly back in the situation it was in at the depths of the global financial crisis in 2008-09 - and in need of a similar policy response, though this time to buy stocks and write off debt.
"We think a four trillion yuan package, roughly equivalent to outstanding margin debt, assuming shadow margin debt is equal to official debt, would work," Condon wrote in a note to clients last week.
