November 12th, 2008 | The Economic Observer Online Another China Bailout? 800 Billion Yuan Stabilization Fund Being Reviewed
An anonymous policy recommendation calling for an RMB 600-800 billion fund to buy up mainland stocks in the event of a market crash has made its way onto the desk of top banking officials.
The report, which included three pages of discussion and a two-page list of target shares, was first sent using an anonymous internal email account to a mailing list at the Research Center of International Finance (RCIF), under the Chinese Academy of Social Sciences, on October 30. It was later submitted to top banking officials as policy advice, the EO learned.
It suggested the government use such a fund to unconditionally buy shares in 50 heavyweight firms listed on the Shenzhen and Shanghai exchanges if the Shanghai index hit 1,500 points.
The RCIF’s director Yu Yongding confirmed the authenticity of the report. According to a researcher at the Center, the report was well received by the financial industry, and the Center had so far received much feedback. Banking officials had long considered establishing such a fund, he added.
According to the report, in extreme cases, the stock market might drop between 800 and 1,000 points, when rescue measures from the government would be meaningless. To effectively prevent panic selling, the government should take action if the index approached 1,500 points, it suggested.
By its estimate, RMB 930 billion would be needed to buy all circulating shares if the index reached 1,500. But, it added, buying one third of the total circulation would be sufficient to bolster the market, which would cost RMB 300 to 400 billion. Based on these calculations, the report then suggested that the government establish an RMB 600 to 800-billion stabilization fund.
The report made other policy recommendations. It suggested that companies who had a large portion of shares controlled by the state should not sell the following two kinds of shares over the next three years: originally non-tradable ones that were made tradable through recent shareholder reforms; and tradable shares bought back from the market.
When China first launched shareholder reforms in state-owned companies in 2005, only a portion of their shares were allowed to be traded in the secondary market.
Furthermore, the report said, fund companies, social security funds, insurance companies and China Investment Corporation, China’s state foreign exchange investment company, should not reduce holdings if the index fell below the 1,500 point line. Only in this way could investors’ confidence be affirmed, the report added.
It recounted a 73% drop in the value of A-shares over the course of this year, and called two major government rescue measures during this period fruitless. Thanks to the depression of major international financial markets and fears of slumping corporate profits, a new round of free-falling started in the A-share market in mid-October.
Since July, securities and fund accounts in China suffered an average loss of over 50,000 yuan, affecting nearly 100 million urban families, the report said.