China orders funds to buy more stocks to revive flagging markets

China orders funds to buy more stocks to revive flagging markets
China orders funds to buy more stocks to revive flagging markets

China’s stock markets reached their peak value before the 2008 global financial crisis and have remained well below that level since. The lack of rising stock prices and falling property prices have discouraged Chinese families from spending, slowing consumer demand and economic growth.

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The Chinese government is trying to encourage people to spend more by ensuring that stock prices will rise, ordering pension funds and mutual funds to invest more in domestic stocks to help exit its markets languishing in the doldrums.

Officials told reporters in Beijing on Thursday that starting this year, mutual funds are expected to increase their holdings of onshore stocks, known as “actions A”, by at least 10% per year over the next three years.

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Commercial insurance funds will have to place 30% of their new annual premiums in equity markets from this year, they said.

“This means that at least several hundred billion yuan of long-term funds will be added to A shares every year,” said Wu Qing, chairman of the China Securities Regulatory Commission.

The announcement was made following a meeting of senior financial officials, including pensions ministries and the central bank.

“The implementation of the various measures of the plan will make it possible to strengthen the capacity to allocate funds in the medium and long term, to regularly increase the scale of investments, to improve the supply and structure of funds on the capital market and to consolidate the conditions favorable to the recovery of the capital market”Wu Qing said.

The ruling Communist Party announced the measure just before China’s biggest holiday of the year, the Lunar New Year, which begins on Wednesday January 29. It’s a time when families tend to splurge on food and travel, and children and young adults receive small packets of red money, allowing them to wish for good fortune.

Markets in Hong Kong and Shanghai rose early Thursday following the announcement, with the Shanghai Composite Index gaining 1.4%. The Hang Seng index in Hong Kong, a market linked to limited trading by mainland Chinese investors, lost its early gains, falling 0.1%.

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A rise in stock prices is seen as a way to open up spending

China’s stock markets are huge, but they peaked before the 2008 global financial crisis and have remained well below that level since. The lack of rising stock prices, combined with falling property prices, has discouraged Chinese families from spending, slowing consumer demand and economic growth.

So far, government efforts to get people to spend more and save less have had mixed success. An initiative to promote the purchase of energy-efficient vehicles and appliances by providing subsidies to people who get rid of their old models has boosted sales of these products. But stock prices remained range-bound after a brief rally late last year.

Wu Qing said pension funds will have to review how they evaluate their performance and companies will be encouraged to make more share buybacks and pay higher dividends to provide shareholders with better returns.

“This is a very important institutional step forward for the entry of medium and long-term funds into the market. We can say that it has resolved a problem that had remained unsolved for many years”he added.

Fewer people are investing long term in the stock market

Selling by major shareholders and high market volatility have handicapped Chinese markets, Lei Meng, China equity strategist at UBS Securities, said in a commentary on Thursday.

So, “the willingness of long-term investors to participate in the stock market has decreased”Lei Meng said, “The proposed market value management reform directly addresses this issue, because it is directly related to investors’ sense of winning.”

But such measures have often failed in the past, as they attempt to override prevailing market sentiment by decree.

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“As we have seen in the past, such efforts can be compared to trying to start a fire with damp wood, which often proves ineffective and short-lived,” said Stephen Innes of SPI Asset Management in a commentary.

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