China’s securities watchdog is investigating the impact of automated trading on share markets, as authorities step up a crackdown on what they regard as heavy speculative selling that could destabilise the world’s second-largest economy.
China’s main share markets, both among the world’s five biggest exchanges, have lost about 30% of their value since mid-June, but authorities have been flailing in efforts over the past three weeks to prevent a further sell-off.
Fearing the turmoil could spill over into the wider economy, which had already been cooling, the ruling Communist party has enlisted the central bank, the state margin-lender, commercial banks, brokers, fund managers, insurers and pension funds to buy up shares, or help fund their purchase, to keep the Shanghai and Shenzhen markets afloat.
The China Securities Regulatory Commission (CSRC), the markets regulator, has also stepped up scrutiny of share traders and their clients, launching investigations of “share dumping” and declaring war on “malicious short-sellers”.
The CSRC announced automated trading as the latest focus of its investigations on Friday, as share markets lost more ground.
China’s benchmark CSI300 index, which comprises the largest listed firms in Shanghai and Shenzhen, dipped in morning trade, although it is still up about 7% over what has been a roller-coaster 2015.
Wang Feng, chief executive of Alpha Squared Capital, a Chinese hedge fund, said the regulator was targeting automated trading programs that involved the frequent cancelling of bids, although he added that his firm did not employ this tactic.
“The CSRC is only targeting those who use program trading to frequently submit and then cancel bids, thus disturbing the market and manipulating prices,” he said. “Such a practice is closely watched by regulators in the US as well.”
The CSRC also said on Friday it had imposed restrictions on 24 stock trading accounts after identifying abnormal bids for shares or bid cancellations which could have affected share prices or influenced the decisions of other investors.
Amid the market turmoil, some foreign investors see an opportunity to buy, believing confidence will eventually return and private Chinese investors will come back to the market.
“At some point, the magnitude of the Chinese market has to reflect its industrial might,” said Yu-Min Wang, chief investment officer at Nikko Asset Management which oversees around US$170bn.
Beijing’s unprecedented but so far unconvincing efforts to hold up the market have led foreign investors to air doubts about the leadership’s ability to ensure financial stability at a time of slowing economic growth, high corporate debt and the threat of deflation.
On Thursday, investors took fright at a newspaper report that banks were trying to get to grips with their financial exposure to the market slump, through wealth management products and loans collateralised with shares.
Reuters could not verify the report.
Beijing’s intervention in the share market has also raised questions over its commitment to free-market reforms, seen as essential for China to pull off its planned transition from an export-led economy to one based on consumption and services.
There are also some worries about the impact of falling share prices on the real economy, though household ownership of shares is very low and – apart from a further drop in luxury car prices – there has been no concrete evidence yet of a major impact on consumption.
However, the market rout has rekindled expectations that the People’s Bank of China will ease monetary policy further in the next few weeks. It has already cut interest rates four times since November and repeatedly loosened restrictions on bank lending.
Japanese brokerage firm Nomura said in a note this week that it expected another 50 basis point cut to the reserve requirement ratio for banks, which would free up more money for lending, and another interest rate cut of 25 basis points before year end.
China’s politburo, a decision-making body of the Communist party, this week promised to step up targeted adjustments of economic policy to foster stable growth.