(Bloomberg) — Chinese stocks were caught in another volatile session Monday following last week’s rout, as investors assessed the latest pledges by policymakers to stabilize the slumping equity market.
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Shares rebounded in the afternoon as the securities regulator said it will take steps to prevent risks stemming from share pledges. The CSI 300 Index rose more than 1% after earlier dipping 2.1%. Gauges of small cap shares pared losses but still remained deep in the red.
Some $7 trillion has been erased from the value of equities in China and Hong Kong since their peaks in early 2021 as a long-running property slump, weak economic data and tensions with the US rattle investors. Margin calls and forced liquidation faced by shareholders are emerging as a key risk after the latest pledge of support provided few details on how authorities will stem the rout.
“The medium cap and the small caps are under intense selling pressure as some investors have been betting on more national team support for the big caps,” said Ken Wong, an Asian equity portfolio specialist at Eastspring Investments. “The long CSI 300 and short CSI 500 and CSI 1000 trade has been one such popular trade.”
The CSI 1000 gauge, frequently used as the underlying benchmark for snowball derivatives, has been facing selling pressure as the products hit so-called knock-in levels that incur losses to investors. It slumped as much as 8.7% early on Monday before paring about half the losses.
Read more: China Snowballs and Their Role in This Year’s Stock Selloff: Q&A
The latest slump has led to fresh concerns over a wave of margin calls as the value of shares put down as collateral shrinks. The fear is that investors failing to top up their margin trading accounts may be forced liquidation of positions.
The China Securities Regulatory Commission pledged on Sunday to prevent abnormal fluctuations, saying it would guide more medium- and long-term funds into the market and crack down on illegal activities including malicious short selling and insider trading.
Taken on its own, the statement may prove insufficient to convince traders who have been repeatedly disappointed by the government’s piecemeal approach to stimulus. Investors are worried about a negative loop where technical selling pressure triggered by margin calls and snowball derivatives worsens the market’s downfall.
‘Really Bloody’
The recent trading volume surge in a few exchange-traded funds suggests China’s state fund may have intervened to prop up the market. However, history shows those purchases rarely have staying power.
Still, some see the sharp moves as a sign of a bottom for the market.
“We are at that usual stage, the final leg in a selloff when things get really bloody,” said Ma Xuzhen, fund manager at Longquan Investment Management. “There’s really no point getting anxious at this stage, we all know it’s near the bottom.”
Foreign funds briefly turned net buyers during the morning session — a pattern also seen on Friday. They were back to withdrawing more than 700 million yuan ($97 million) of shares in the afternoon.
Meanwhile, Liu Yuhui, an academic at a government think tank, was cited by a report as saying that the nation should set up a stocks stabilization fund as soon as possible to boost market confidence, with an aim to get its size to 10 trillion yuan ($1.4 trillion) or more.
In another sign of how exasperated some investors have become, thousands flocked to a social media account of the US embassy in Beijing to vent their frustrations over the economy and slumping share prices. China’s internet users often struggle to find a venue to air grievances about the economy or government performance, with official accounts of state agencies or media usually either disabling the comment function or only showing selected feedback.
“Whether or not today marks the floor to Chinese equities is yet to be seen but it sure feels as though we’re bumping along the bottom as policymakers have signaled they no longer want to see any further declines,” said David Chao, a strategist at Invesco Asset Management.
–With assistance from Charlotte Yang, Abhishek Vishnoi and April Ma.
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