Presenting China's Plunge Protection Playbook

Earlier today we were amused (but not at all surprised) to learn that Beijing's latest strategy in the fight to rescue collapsing Chinese stock prices involves forbidding local media from using terms like "rescue the market" and "equity disaster". Here's a concise recap of the situation: 

Officials in Beijing are in the throes of Politburo panic after watching some $3 trillion in market value disappear into thin (and probably polluted) air over the last three weeks. Amid the turmoil, China has resorted to an eye-watering array of policy maneuvers, pronouncements, and plunge protection schemes aimed at arresting the slide. 

 

Nothing has worked; not suspending compulsory liquidation for unmet margin calls, not billions in committed market support from brokerages, not a PBoC backstop for the CFSC, not even a ban on selling by the Social Security Council. And when banning selling doesn't work, you have to ban talking about selling.

 


Indeed, it's truly amazing to consider the lengths China has gone to over such a short period of time in a futile attempt to resurrect the margin-fueled equity bubble that has served as a convenient distraction for a country that might otherwise be focused on decelerating economic growth and a collapsing real estate bubble. 

Because there's still a long way to go before the panicked deleveraging in backdoor margin lending channels runs its course, we expect to see Beijing resort to still more desperate measures to arrest the slide. Meanwhile, Morgan Stanley — whose "don't buy this dip" call might well have been the straw that broke the dragon's back so to speak — is out with a detailed history of China's plunge protection playbook. Below is a visual representation followed by the detailed breakdown.

From Morgan Stanley:

Taking action to stabilize the A-share market

June 27: RRR cut and rate cut

The People’s Bank of China (PBOC) announced cuts in the benchmark 1-year lending rate of 25bps to 4.85% and the 1-year deposit rate of 25bps to 2.00%, effective June 28, 2015. Meanwhile, the central bank also cut the RRR applied on qualified financial institutions with a focus on rural and/or SMEs loans by 50bps, and that on finance companies by 300bps. This is the first combined interest rate and RRR cut taken during this round of policy easing. Morgan Stanley expects the move to release around Rmb230bn of liquidity into the system.

June 29: Up to 30% of US$570bn pension fund likely to be invested in stock market

“Basic Rules of Pension Insurance Fund Investment Management ” has started to solicit feedback from the public. According to the preliminary draft, up to 30% of the fund could be invested in equities and equity-related investment products.

June 30: 13 major private fund managers jointly voiced bullish views on A shares

Thirteen major China private fund managers jointly announced that the core foundation for the A-share rally has not changed – stable monetary policy, structural reform, asset reallocation by Chinese households. The risk-return profile has improved after the recent correction and provided good investment opportunities for mature, rational investors. The joint announcement was organized by China Asset Management Association.

June 30: Easing of regulations/rules on margin financing

1. On existing margin financing through unofficial channels: CSRC announced that total underground margin financing is estimated to be Rmb500bn. The total amount of mandatory position closing during the previous two weeks was only Rmb15bn.

2. On regulations/rules regarding margin financing through unofficial channels: CSRC announced that brokerage firms are allowed to provide data feed connection to web-based securities services operated by qualified third parties.

Service providers that have been involved in rule-violating activities will need to go through reforms and rectifications. During this period, the service provider can continue providing service for the existing margin balance, but not grow any new business.

3. On regulations/rules regarding margin financing through brokers: One major Chinese broker, Guo Tai Jun An, announced on its website that it had decided to adjust up the collateral conversion ratio for selective CSI 300 Index constituent companies (equity holdings that could be used as collateral for margin financing) and adjust down margin maintenance requirement, effective starting from July 1.

July 1: Easing of regulations and rules on margin financing

1. CSRC announced new rules on margin financing through a new version of “Brokerage Firm Margin Financing Business Management Rules”.

a) Removes the requirement of margin calls with two business days when investor’s collateral market value falls below 130%, and that total value of collateral (existing + additional) needs to be above 150% of the financing amount.

b) Allows brokerage firms and their clients to decide between themselves the requirement for the deadline and amount for margin calls.

c) Allows more flexibility for brokers to treat investors’ collateral – forced liquidation is not mandatory any more.

d) Brokerage firms are allowed to roll over existing margin financing contracts that are not longer than six months.

2. The Shanghai Stock Exchange announced that real estate and equity ownership can be used as additional collateral if margin calls get triggered.

July 1: Increase of shareholding by listed companies

1. Increase of shareholding by major shareholders: Between June 15 and July 4, major shareholders of 182 A-share listed companies have increased their shareholding through secondary market purchase. There were more 20 listed companies announcing shareholding increases on July 3.

2. Shares repurchase by A-share listed companies: China Vanke A (000002.SZ), TCL Corporation (000100.SH), Media Group (000333.SZ), BOE Technology (000725.SH), Bright Oceans Inter-Telecom Co Ltd (600289.SH)

July 2: Reduction of equity trading transaction fee

The Shanghai Stock Exchange, Shenzhen Stock Exchange, and China Securities Depository and Clearing Corporation Ltd announced reductions to A-share trading transaction fees: from 0.03% of transaction face value to 0.002% for Shanghai Stock Exchange, from 0.00255% to 0.002% for Shenzhen Stock Exchange, effective from August 1.

July 3: China Securities Finance Corp Ltd (CSFC) capital increase and share expansion

CSRC announced that CSFC will expand its registered capital from Rmb24bn to Rmb100bn. CSFC will raise funding from multiple channels in addition to stabilize capital market.

* CSFC was founded in 2011 under the context of beginning of margin financing business in China. It is the only investment business entity in China that has been approved to practice margin refinancing. Its business is mainly focuses on: 1) raise financing to lend to brokers for their margin financing business; 2) provide a platform for insurance companies, mutual funds, strategic shareholders of listed companies to lend out their equity holdings.

CSFC's major shareholders include: Shanghai and Shenzhen stock exchanges, China clearing, CFFEX, Dalian Commodity Exchange and Zhengzhou Commodity Exchange. Besides the refinancing business, it also tracks and monitors the overall margin financing business in China, analyzes market and credit risks, etc.

July 3: Reduction of IPOs in terms of both numbers and the amount of capital raised

CSRC announced at its press conference that the number of IPOs and the amount of capital to be raised through IPOs will be significantly reduced subsequently.

July 4: 28 approved IPOs got suspended

Twenty-eight approved IPOs that have been scheduled for subscription in July will be suspended. Subscription fund is returned to investors’ investment accounts on July 6.

July 4: 21 major Chinese brokerage firms to invest Rmb120bn in blue chip ETFs

Twenty-one major brokers announced that they will jointly offer minimum Rmb120bn to buy blue chip ETFs. These companies promised not to sell their positions as long as the SH Composite Index is below 4500.

July 4: 25 major Chinese mutual funds to invest in equity funds managed by themselves

Twenty-five mutual funds jointly announced:

1) Chairmen and general managers of these funds promised to actively purchase equity funds managed by their own companies and hold shares for at least one year.

2) Re-open funds whose subscription has been closed to offer investors more investment options

3) Expedite equity funds’ application and distribution, and build positions with newly raised funds according to the funds’ mandates.

* China Asset Management Association announced that by July 6 2015 57 mutual funds are reported to have committed Rmb2.2bn to equity funds managed by themselves. in total 62 mutual funds (including the 25 ones mentioned above) have made public announcements supporting the 25 mutual funds' proposal.

July 5: China HUIJIN's investment in A-share ETFs

China Central HUIJIN Investment Company announced on its website that it has been purchasing open-end A-share ETF index funds on the secondary market, and that it will continue relevant market operations.

July 5th : CSRC announcement of tighter measures against market manipulation and rumor distribution activities

CSRC announced at its press conference that:

1. Plans for upcoming IPOs: There will be no new IPOs in the near term after the 28 approval IPOs got postponed. Processing of new IPOs will not stop; however, the number of new IPOs and the capital to be raised through these IPOs will be reduced significantly.

2. Actions against shorting index future: CFFEX (China Financial Futures Exchange Inc) has restricted opening positions on CSI500 Index future contracts for some investment accounts. CSRC has required CFFEX to strengthen its inspection actions and coverage to collaborate with CSRC on illegal transactions and market manipulating trading activities.

3. Actions against rumors: CSRC has initiated securities law targeted law enforcement actions against creating and distributing stock market rumors.

July 5: China Securities Finance Corp Ltd (CSFC) to stabilize the market with liquidity support from PBOC

CSRC announced that China Securities Finance Corp Ltd (CSFC) will raise funding through multiple channels and play an active role trying to stabilizing the market. PBOC will provide liquidity support for this purpose.

* There is no specific limit attached to the liquidity support mentioned in CSRC’s announcement.

July 6: CSI500 Index Future to have trading limit of 1200 lots

China Financial Futures Exchange (CFFEX) announced a daily trading limit for CSI 500 index future (IC500), effective on July 7 2015. Investors can only buy up to 1,200 lots of CSI 500 index future contract for either long or short positions.