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China financial regulators support stocks with policy outlook, cash

In a statement published this morning, the China Securities Regulatory Commission said most of the major shareholders would not sell their stakes in the public markets anyhow and estimated such open market sales would constitute only 0.7% of the total market cap.

The regulator did say, however, that the circuit breaker needed improvement.

While the CSRC reiterated that circuit breakers play an important role in stabilising the market, Citigroup, Deutsche Bank and Nomura said the rules failed to restore calm on Monday as investors scrambled to exit positions before getting locked in by the halts. The plunge was partly blamed on the ending this Friday of a six-month ban on share sales by major shareholders and senior executives. On Monday China’s central bank cut the reference rate for the yuan by some 0.3 percent, leaving the yuan at 6.5172 against the dollar, its lowest rate in nearly five years.

Kevin Leung, director of global investment strategy at Haitong International Securities, said the A-share markets were likely to see more trading suspensions in the next week or two with the circuit breakers in place.

Chinese stocks extended their losses on Tuesday although an index of large-cap shares in Shanghai and Shenzhen edged up at the close as the so-called “national team” of the government bought shares to stem the rout which hit equities in the previous session.

“This helped prevent investors from panic selling on Tuesday”, he said.

The experience has further rattled some retail investors – who dominate transactions on Chinese exchanges. Some observers have also suggested that linking the circuit breaker to just the China Stock Index of 300 of the country’s biggest shares, rather than all China’s listed companies, makes the new system more vulnerable to manipulation.

Analysts pointed to the fact that after a 15-minute suspension of trading when the market fell 5 percent after lunch Monday, there was a further rapid sell-off that led to its closure for the day a few minutes later, after dropping 7 percent.

Mr Deng said the regulator was studying ways to control the pace of sales when the limit is lifted.

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