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China’s financial authorities proposed setting up a stock market stabilization fund to boost sagging domestic investor confidence as newly released data showed the world’s second-largest economy’s recovery remains fragile.
Four people familiar with the matter said Beijing is considering the plan, which could involve investing in domestic stocks through existing financial institutions and professionally managed funds, one of the people said. Government funding will be matched by its partner funds and agencies, the person added.
Financial sector regulators including stock market regulator China Securities Regulatory Commission and the Ministry of Finance have submitted the proposal to China’s State Council, which will ultimately decide how the fund will operate, two of the people said.
Two people familiar with the proposal said the plan would need to raise at least 100 million yuan ($137 billion) to take effect. “The fund needs to be large enough to impact the market. Hundreds of billions of yuan are not enough to boost confidence. We need at least 10,000 yuan.” said a government consultant involved in fund design.
Regulators have been discussing the idea of a stabilization or intervention fund since 2015, but the proposal gained new ground this year.
Beijing has been trying to rekindle confidence in China’s capital markets and overall economy as a real estate market crisis and a slump in foreign trade put pressure on China’s recovery from the epidemic.
The weakness was underlined by official data released on Friday, which showed China teetered on the brink of deflation again last month, with consumer prices unchanged in September from a year earlier. The producer price index, which measures the price of goods sold by manufacturers, fell 2.5% from the same period last year.
Both inflation measures were slightly weaker than forecasts by analysts polled by Reuters. In August, CPI rose only 0.1%, recovering from negative readings last month, while PPI contracted 3%.
Trade data released on Friday also provided policymakers with better news. China’s exports fell by 6.2% year-on-year in September, which was an improvement from the 8.8% decline in August and exceeded analysts’ expectations of a 7.6% contraction.
Imports also fell 6.2% in September, better than the 7.3% drop in the previous month but slightly lower than expected. The country’s trade balance this month was $77.71 billion, up from $68.36 billion in August.
The proposed stabilization fund comes as Beijing steps up efforts to boost China’s sluggish stock market and curb capital outflows. This week, authorities launched the first takeover program targeting top bank stocks since the global financial crisis and banned brokers from opening offshore trading accounts for domestic investors.
Central Huijin, the sovereign wealth fund that bought shares in the bank, pledged to continue buying the shares over the next six months.
Despite these efforts, China’s benchmark CSI 300 index of stocks listed in Shanghai and Shenzhen is still down about 1% this week and is down more than 10% year-to-date in dollar terms as foreign investors continue to outflow.
A person familiar with the matter said that the purpose of the stabilization fund is to rekindle enthusiasm for entrepreneurship, stimulate the listing of new stocks, form a virtuous circle, and boost domestic economic confidence. This will also increase the availability of venture capital, the person added.
“We need the stock market to boom to make households wealthier so they can spend more,” the government adviser said.
Chinese policymakers believe the economy is resilient and expect to achieve its official target of 5% gross domestic product growth this year, the lowest level in decades. The country will release third-quarter GDP growth data next week.
But analysts say that while the economy is showing signs of stabilizing after a weak second quarter, the recovery remains fragile and policymakers have rolled out only a patchwork of support measures.
“CPI inflation at zero indicates that China’s deflationary pressure remains a real risk to the economy,” said Zhang Zhiwei, chief economist at Pindian Asset Management. “Without a significant boost from fiscal support, the recovery in domestic demand is not strong.”
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