China stock markets volatile but losses limited by liquidity injection

Chinese stock markets remained volatile on Tuesday, following their early bath the previous day thanks to the new circuit-breaker mechanism, but moves to calm markets helped reduce losses.

After an initial wobble, shares on the Shanghai Composite ended a choppy session only slightly lower after the People’s Bank of China injected 130 billion yuan (£13.6bn) into the financial system.

The near-$20bn of reverse repurchase agreements appeared to ease Chinese liquidity concerns and offered enough comfort for equity investors in Europe to begin the session on the front foot, after Monday's steep losses exacerbated by the geopolitical tension between Iran and Saudi Arabia.

Furthermore, several large Chinese companies said their major shareholders and senior executives would voluntarily extend a ban on sales of shares in the secondary market.

Reuters reported that at least 10 companies said their main shareholders had agreed not sell shares on the secondary market within the next six or 12 months.

Although China's disappointing manufacturing PMI data was held up as one reason for Monday's scares, worries about Friday's expiration of a six-month ban on selling for large investors played a large part in Monday’s 7% fall.

It is feared that the ending of the ban on 8 January will unlock what is calculated to be around 1.24trn yuan of shares.

China's securities watchdog, the CSRC, confirmed on Tuesday that it was mulling new rules to regulate share sales by major shareholders and senior executives, Reuters added.

Citi agreed that the fear of the rule expiration "could be a key sell-off trigger" and it estimates "100bn yuan monthly real selling pressure in upcoming months if the rule expires naturally".

Analysts at Citi also said they felt the circuit breaker mechanism was "too conservative" given Chinese shares' extreme turnover velocity.

Mike McCudden, head of derivatives at stockbroker Interactive Investor, said: “The PBoC, which has been acting valiantly over the past year by throwing any means at their disposal at the stuttering economy, must surely be running out of ideas. However, this morning's bounce is largely down to their continued efforts.”

Over the medium term, many economists seem fairly sanguine about China's prospects.

RBS’s macro credit strategist Alberto Gallo said Beijing had sufficient ‘dry-powder’, in terms of room to apply more stimulus measures, to assist the economy as it rebalanced towards internal consumption and away from exports and investment.

However, with the economic transition likely to take years Chinese leaders were likely to introduce new support measures only sparingly.

Similarly, Mislav Matejka at JP Morgan said he saw signs that the Chinese consumer was stabilising to some degree.

“Retail sales, house prices, car sales, property transactions and M2 have all improved. New infrastructure orders are also showing signs of life. All these are important to keep in check the overwhelmingly bearish sentiment on the region.”