China vows market stability after biggest drop in eight years

China Securities Regulatory Commission (CSRC) vowed to continue to take measures to stabilize the stock markets after share prices on the Shanghai Stock Exchange plunged 8.48 percent on Monday, the largest single-day drop since June 2007. Fears that the government may halt support measures may have triggered the drop, analysts said. The CSRC also said that it will look into the possibility of malicious short-selling activities, and welcome public support in identifying alleged short sellers and "severely" punish offenders. The benchmark Shanghai Composite Index dropped 345.35 points to close at 3,725.56 points on Monday, while the Shenzhen Component Index fell by 1,025.46 points, or 7.59 percent, to 12,493.05 points. Over 2,000 stocks on the Shanghai and Shenzhen bourses saw their share prices drop on Monday, with around 1,800 of them plunging by the daily limit of 10 percent, reports said. Only 77 stocks managed to gain on Monday. National Bureau of Statistics data showed on Monday that the combined profits of major industrial enterprises have declined 0.3 percent in June from the same period last year and dropped 0.7 percent in the first half. Also, the preliminary reading of Caixin's July manufacturing Purchasing Managers' Index (PMI) announced on Friday came in at 48.2, which was the weakest reading since April 2014, indicating that the industrial sector is still experiencing difficulties. A reading below 50 shows investments in the industry are dropping. But Li Daxiao, chief economist at Shenzhen-based Yingda Securities, said that the weak economic data is only a minor reason for souring market sentiment. "The more important factor is that some stocks on the two bourses are still overvalued, leading to the market correction," Li told the Global Times on Monday. The market has been recovering in recent days. Before the Monday plunge, the Shanghai Composite Index had gained over 16 percent from its July 8 low. Authorities announced measures to arrest the market slump that began on June 12, including a relaxation on margin trading rules - using borrowed money to invest in the market - a ban on major shareholders from selling within six months and a crackdown on "malicious" short selling. Southwest Securities announced on Monday that one of its shareholders, Chongqing Yufu Assets Management Group, is being investigated by the CSRC, as the Chongqing-based company has allegedly violated relevant laws or rules on reducing its holdings in the company. Market fears that the government may withhold further support measures may also be a reason behind the Monday retreat, according to analysts, after the International Monetary Fund (IMF) called on the Chinese government to refrain from rescue measures. Additional measures "If the market remains turbulent, the government may roll out additional measures to back the stock market," Liu Xuezhi, an analyst at the Bank of Communications, told the Global Times on Monday. Yingda's Li also said that it is unlikely that the Chinese government will accede to the IMF's call, adding that "State investors will be more prepared [if the market further tumbles] given the experience from the previous turbulence." Besides the disappointing economic data and fears of an end to government support, the CSRC's efforts to crack down on insider trading and other irregularities, despite long-term benefits, may have temporarily dampened the market, analysts said. The CSRC announced on Monday that it is investigating a firm in Shanghai and another in East China's Zhejiang Province on possible financing irregularities. The prospect that the US Federal Reserve may raise the interest rates in the fourth quarter as well as uncertainty in China's future monetary policies may also have contributed to the Monday drop, analysts said. The recent surge in pork prices in China, which may raise the inflation rate, could make it less likely that the central bank will adopt more relaxed monetary policies in the second half of the year. Liu said that it is still possible for the central bank to reduce the banks' reserve requirements in the second half of the year, but further interest rates cuts are unlikely. Despite this, Liu believes that the stock market will stabilize in the second half of the year amid the improving economy and the government's support measures. Besides, recent news reports said that up to 1 trillion yuan ($161 billion) from the social insurance fund may soon be invested in the stock market. Some investors think the stock market is intentionally being suppressed as the social insurance fund usually enters in a bearish market. "It [the speculation] is groundless," Li said, adding that the possible entry of the social insurance fund would merely boost the market.