China’s tools for propping up its stock market: Warnings, liquidity boost

Chinese financial authorities have been striving to prop up the country’s stocks through various measures, including steps aimed at increasing the liquidity in the market as well as warnings against malpractices.

With the onshore markets already erasing gains after the People’s Bank of China announced steps to boost liquidity last month, there are doubts whether this familiar Beijing playbook will have a meaningful impact on markets.

On Tuesday, Central Huijin, a unit of the mammoth sovereign wealth fund China Investment Corporation, said it had expanded purchases of exchanged-traded funds linked to the country’s onshore stocks to safeguard market stability.

This follows successive statements over the last few days by China’s securities regulator aimed at settling investors’ nerves, including a pledge to “guide” institutional investors to increase investment and encourage companies to step up share buybacks.

China Securities Regulatory Commission had also warned Monday against “malicious” short-selling and said it would step up scrutiny of margin financing following a volatile trading session. On Sunday it had assured to protect the interests of investors after onshore markets plunged as much as 3% before paring losses Friday.

“Here’s a warning: do not test the law or you will end up picking chestnuts from the fire,” the country’s securities regulator said late on Monday, in a literal CNBC translation of two Chinese proverbs.

These moves are reminiscent of previous attempts at shoring up market routs. Central Huijin is part of the “national team” of Chinese state-linked investors that have been employed to shore up the stock market with strategically timed purchases.

Social stability sits at the core of President Xi Jinping’s approach towards “high quality” financial development, which adheres to a “combination of the rule of law and the rule of virtue.”

Bloomberg reported late Monday China was tightening trading restrictions for domestic institutional investors as well as some offshore units.

In a speech last month, Xi said financial supervision must be “thorny” and sharp, while all efforts should be made to prevent and resolve financial risks, especially systemic risks to foster a financial culture with Chinese characteristics.

Bloomberg also reported the Chinese regulators were set to brief Xi as soon as Tuesday on the state of the financial markets.

China’s central bank’s 50 basis points cut to reserve ratio requirements, announced on Jan. 24, came into effect on Monday. It will inject 1 trillion yuan ($139.8 billion) in long-term capital into the market ahead of the week-long Lunar New Year holiday.

“In the process of risk management, corruption must be resolutely punished and moral risks must be strictly prevented,” he added.

— CNBC’s Evelyn Cheng contributed to this story.