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China’s stock market crash may derail govt’s economic reforms

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Beijing: China’s recent stock market crash, wiping out about three trillion dollars in capital, could play havoc with the Chinese government’s economic reforms and dash hopes of stock markets being effective fundraising channel to encourage start-ups, experts have said.

The crash has been a bitter pill for the real economy, and will be a huge comedown for policymakers if they are forced to revisit Premier Li Keqiang’s “new normal” growth plan for slower, healthier economic development, Hong-Kong based South China Morning Post quoted experts as saying.

Li raised the profile of the capital markets after he took the helm of the world’s second-largest economy in 2013, encouraging technological start-ups to net much-needed growth funds on the stock exchanges and the over-the-counter markets.


“The market crash could dash the government’s hopes for the stock market being an effective fundraising channel. The worst is yet to come and it’s nearly certain the collapse will hijack the originally planned policymaking,” Wang Feng, chairman of Shanghai-based private equity group Yinshu Capita told the Post.

Since June 12, the benchmark Shanghai Composite Index has plunged 29 per cent, sparking a crisis of confidence among investors who now believe the downward spiral will last some time.

The dramatic fall, that has wiped out nearly USD three trillion in market capitalisation since June 12, sent a warning to China’s economy that has already faced downward pressure such as sluggish external demand and weak investments, state-run Global Times reported.

The slump prompted China’s securities watchdog to order probe into the market manipulation activities of Chinese stock and futures trading.

China Securities Regulatory Commission’s (CSRC) announcement on Friday that it would reduce the number of the Initial Public Offerings in early July to 10 in the latest effort to stabilise market prices, as a sizable chunk of investors’ money is frozen during the IPO subscription process, causing share prices to fall.

In April, the CSRC decided to approve two batches of IPO applications – 45 new shares were listed in May and 47 in June, causing concern about a glut of shares.

The stock market has lost around 29 per cent of its value since its peak of 5,178.19 points on June 12. A steady drumbeat of government easing policies including interest rate cuts and a reduction of securities transaction fees has failed to reverse the trend, the Global Times report said.

“Apparently, the market collapse will deter the regulator from conducting major IPO reform,” Zhou Ling, a hedge fund manager at Shanghai Shiva Investment.

“Severe losses by millions of investors in equities is a serious political issue, one that’s much more urgent than the market reform,” he told the Post. “It will prompt the leadership to reassess the effectiveness of the policymaking,” Orient Securities chief economist Shao Yu.

“The government needs to re-work the policy to find out which element they should focus on now, whether it’s opening-up the financial markets, the innovations, or the risk- control,” he told the Post.