China Bans Big Investors From Cutting Stakes For Next 6 Months

Published on 10 Jul, 2015

China Investment Research

On 8th of July this year, China took one of the most drastic steps to control the unprecedented collapse seen in its stock markets in the past few weeks. The country’s securities regulator banned investors from selling shares in companies with current holding in excess of 5% for a period of six months. The ban spans domestic institutions, government enterprises, promoters, and foreign institutional investors.

This drastic step follows a spate of control measures taken by the government to arrest the market free fall. Some of these moves include fund support in excess of $40 billion to domestic brokerages by state-owned Securities Finance Corporation; boosting the state holding in companies; plugging the IPO market temporarily; reducing trading commissions; and allowing outright suspension of trading of mid-sized and small-cap companies.

Although a small percentage of foreign institutional investors are affected by the ban, we believe that these steps could be more damaging to China’s perceived image among the global investors. Such damaging steps, actually, could counter-weigh the benefits of stemming the decline. This move could also dilute the government’s efforts to achieve financial market liberalization and greater transparency. In fact, the current slump in the market has, to some extent, taken the sheen of China A-shares’ expected entry into the MSCI Emerging Markets index. The market sell-off and the local regulator’s seemingly desperate reactions have clearly underscored the issues MSCI had raised with respect to Chinese stock markets.

The impact of the Chinese wealth erosion may have much larger global implications, and the concerns are being shared by governments, corporates and investors alike. Majority of participants in China’s local equity markets are retail investors. If the free fall worsens, a significant drop in their portfolio asset values could trigger a wide-spread economic crisis that could impact consumption, imports and eventually investments. The global economy, it seems, could be at a greater risk from the ‘Orient’ than from the unfolding ‘Greek tragedy’.

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