Singapore: Chinese authorities are considering measures to stabilise a slumping stock market, Bloomberg News reported, opens new tab on Tuesday citing people familiar with the matter, drawing a sceptical response from underwhelmed investors.
Policymakers are seeking to mobilise about 2 trillion yuan ($278.53 billion), mainly from offshore accounts of state-owned enterprises, as part of a stabilisation fund to buy shares onshore through the Hong Kong exchange link, Bloomberg News reported.
The China Securities Regulatory Commission did not respond to a Reuters request for a comment.
Chinese stocks rose immediately after the report but reversed course later to slip lower and were last broadly flat. The bluechip CSI300 Index, opens new tab was rooted near a five-year low, while the Shanghai Composite Index, opens new tab remained below the psychologically key 2,800-point mark.
China's stock markets have had a wretched start to the year, with patchy economic growth and a renewed slump in home sales last week solidifying foreign investors' resolve to steer clear.
The report came after the cabinet, following a meeting chaired by Premier Li Qiang, on Monday said it would step up mid- and long-term fund injection in the capital market to strengthen stability and promote healthy development.
"China's stock market package is a welcome measure and shows increasing responsiveness from the authorities. But at under 2 percent of its GDP, we fear this is still inadequate," said Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management.
Global money managers - who have been sellers of Chinese stocks as the post-pandemic recovery sputtered - said it will take a long time or major stimulus to repair the property sector, which at one time accounted for a quarter of the economy, and change their minds.
Overseas funds have sold roughly $1.6 billion in Chinese equities so far this year, driven mainly by European active funds and Hong Kong passive money, Morgan Stanley said in a report last week.
Chinese investors are also shunning stocks.
Bloomberg in its report said Chinese officials have allotted at least 300 billion yuan of local funds to invest in onshore shares through China Securities Finance or Central Huijin Investment.
They are also considering other options, some of which they may announce as soon as this week if approved by top leadership, Bloomberg reported.
Analysts said China's plunging stock market is leading to losses on billions of dollars worth of derivatives linked to the country's equity indexes, forcing a vicious cycle of selling in stocks and futures contracts as market participants manage their risks.
Stock markets in Hong Kong, opens new tab and in mainland China plunged on Monday, extending a long spell of weakness driven by an exit of foreign investors alarmed by China's wobbly economy and a lack of stimulus measures.
Share prices stabilised somewhat on Tuesday after authorities announced plans to support the market, but analysts were hesitant to cheer.
The small-cap CSI1000 index, opens new tab has traded below the 5,000 level this week, after a 6 percent plunge on Monday to its lowest level in nearly four years.
Market participants said the drop triggered "knock-in" levels on "snowball" products, also known as "auto-callables" in some markets, leading to forced selling of stock futures contracts which further pressured the market.
"There is a wave of retail structured products termed snowballs that are reaching their ‘knock-in” levels, i.e. where they stop out," said Jon Withaar, who manages an Asia special situations hedge fund at Pictet Asset Management.
The spike in futures trading volumes showed these products had been hedged via stock futures, he said.
"Snowballs" are derivatives in which investors receive a bond-like coupon if the underlying assets, such as the CSI500 and CSI1000 indexes, do not hit a pre-determined "knock-in" level.
They were popular among investors until recently, when such knock-ins started happening more often as indexes fell.
Analysts at UBS estimate the outstanding notional amount in such products is around $50 billion and that roughly 40 percent of knock-ins have likely been hit.
Brokerage China International Capital Corp estimated the average knock-in levels for many snowball products tied to the CSI500, opens new tab and CSI1000 are at 4,865 and 4,997, close to where the indexes are.
Analysts at Bank of America said the snowball effect was one of the reasons for the stock market drop, and a drag on the already weak stock market. The bank estimates a further 6 percent to 7 percent decline in the CSI500 or CSI1000 indexes will trigger another round of knock-ins.
One retail investor Mr Shi, who asked to be identified only by his last name, said he invested one million yuan ($139,466) in snowballs tied to CSI1000 index and discovered his products had hit the knock-in level on Monday.
When he bought the two-year products in early 2023, he was expecting to earn a return of at least 8%. But now, unless the index rises above the 7,000-level within a year -- implying a 40% rise from current levels -- he will earn no coupon and also lose some of his principal.
Meanwhile, as knock-in levels are being hit, brokers are selling stock index futures to hedge their exposures.
Futures contracts on CSI1000 due in Sept 2024 fell by the daily maximum limit of 10 percent on Monday to levels 8 percent below where the index was trading.
Futures contracts tied to CSI1000 due in February saw turnover spike to 93 billion yuan on Monday. That compares to an average of daily turnover of 13 billion yuan in the past month.
Zhou Zhiyang, a fund manager at Jiahe Private Fund Management, said the divergence between futures prices and spot prices was drawing in arbitrageurs, seeking to profit by selling spot markets and buying futures contracts.
Snowball products are similar to the index-linked products sold in the 2008 financial crisis, with investors betting that U.S. equities would not fall more than 25 percent or 30 percent, David Huang, senior investment strategist at AllianceBernstein, said at a press briefing last Friday.
"And it turned out, what you think wouldn't happen, ended up happening. This also shows that A-shares may indeed be on their last round of falls," Huang said, suggesting that the related selling could signal share prices may be nearing a bottom.