China to create $19B fund to support plunging stock market

A stock investor looks up in a brokerage house in Shanghai Friday July 3, 2015. China cut the number of initial public offerings planned this month by two-thirds on Friday, adding to frantic efforts to shore up plunging stock prices following another 5.7 percent decline in the country's main market index. (Chinatopix Via AP)

NEW YORK (AP) — China has reportedly decided to bar new initial public offerings of stock and create a fund to stabilize its stock market, which has been roiled by a wave of selloffs.

Twenty one Chinese securities companies, in a joint statement released Saturday, said they would pledge no less than 120 billion yuan ($19.33 billion) to invest in Chinese stocks and funds. The securities companies also said they would continue to invest in the market as long the Shanghai Composite index, the Chinese equivalent of the Standard & Poor’s 500 index, remains below 4,500. It closed at 3,686 on Friday.

The statement was posted on the website of the Securities Association of China.

Chinese regulators have also decided to temporarily suspend new Chinese initial public offerings, according to The Wall Street Journal, citing Chinese officials.

The Chinese stock market has been in free-fall for three weeks, losing 28 percent of its value since June 12. Despite the plunge, the market is up 79 percent in the last year. The drop has wiped out several trillion dollars in market value in a matter of weeks.

Even though China is the world’s second-largest economy, the Chinese stock market remains largely isolated. Foreign investors can only indirectly participate in the market through funds or through specialized brokerage services. Unlike the U.S. and European markets where institutional investors play a major role, the Chinese stock market is dominated by individual investors.

For months, state-owned media had encouraged ordinary Chinese to load up on shares. Many Chinese individual investors borrowed heavily to buy stocks — taking out so-called margin loans. And the rising stock prices encouraged companies to raise money by issuing shares and to use the proceeds to pay down debt.

In the first half of the year, the Shanghai stock market led the world in initial public offerings: 78 companies issued shares in Shanghai, raising $16.6 billion, according to a study by the accounting firm EY. Hong Kong was No. 2 with 31 deals that raised $16 billion. Shenzhen was No. 5 with 112 deals that raised $7 billion.

 

Copyright 2015 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

 

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