June 19, 2018, 7:54 pm
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China’s $50B bid for market calm might backfire

HONG KONG- China’s near-$50 billion bid for market calm might backfire. The securities regulator last week approved six new funds that will guarantee demand for a string of big tech listings, while locking up backers’ money for three long years. The intention is probably to dampen a frothy market, but there could be unintended consequences: thinly traded stocks that are, in fact, more volatile and fund investors who might end up regretting being trapped.

Individual buyers and institutions alike can invest in the new funds, which are each raising up to 50 billion yuan ($7.8 billion), or about $47 billion in total. The resulting vehicles will act as “strategic investors”, getting priority allocation of shares in new listings in exchange for holding the stocks for extended periods.

The innovation is part of Beijing’s wider effort to ensure enough demand while keeping wild price swings in check. Regulators last week finalised new rules to allow smartphone-maker Xiaomi, ecommerce titan Alibaba and other offshore-listed outfits to sell shares at home using so-called Chinese depositary receipts. But mainland exchanges are dominated by mercurial everyday punters who pile in and out of stocks on a whim.

Yet tying up a huge chunk of shares could make the market choppier. Analysts at Morgan Stanley reckon near-term CDR supply could total some $55 billion. If so, the six funds combined would account for most of that, and reduce the actual number of tradable shares.

Foxconn Industrial Internet’s 601138.SS recent $4.3 billion initial public offering enlisted 20 strategic buyers, mostly state-owned funds, with lockup periods for as long as three years. That meant less than 6 percent of shares outstanding were free to trade – probably one reason, alongside a low initial valuation, why FII stock subsequently soared.

The three-year restriction on investors withdrawing money is highly unusual too. In the West, it is rare to see such lengthy prohibitions, even for the hottest hedge funds. If the current exuberance about Chinese tech were to turn sour, investors would find they had no way to sell and limit their losses. Given a widespread belief that Beijing ought to bail out investors if things go wrong, that could create an even bigger headache for regulators. 

China’s primary money rates fell this week as liquidity deepened at the start of a month and market sentiment improved after a net long-term cash injection led by the central bank. 

The volume-weighted average rate of the benchmark seven-day repo traded in the interbank market, considered the best indicator of general liquidity in China, fell during the week to 2.6864 percent on Friday afternoon.

That was about 26 basis points lower than the previous week’s closing average rate of 2.9415 percent.

Traders said higher cash demand at the end of May - like every month - had faded, and cash conditions were balanced, even with a loosening bias this week.

The People’s Bank of China (PBOC) lent 463 billion yuan ($72.23 billion) to financial institutions on Wednesday via its 1-year medium-term lending facility (MLF), more than offsetting 259.5 billion yuan of such loans maturing the same day.

“The higher-thanexpected liquidity injection against the backdrop of rising default risk shows central bank’s intention to ease market concern about the credit risk,” OCBC Bank said in a note, referring to a spate of recent corporate bond defaults that prompted worries over credit conditions.

Analysts believe the PBOC’s move may possibly push back another cut in banks’ reserve requirement ratio (RRR), which unfreeze more liquidity for smaller lenders who do not have direct access to the central bank’s liquidity facility.

Markets have generally expected another RRR cut in the second half after April’s surprise reduction, with some speculation it could come as early as this month or July.long term
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