China’s stock markets suffered their biggest three week loss in twenty years after falling by nearly 10% on 2-3 July. In what has been interpreted as a ‘state’ intervention, the country’s 21 largest investment banks said they would spend about US$19.3 billion to try to stabilize the market and buy stocks themselves. They are being helped by the state-backed margin finance company, China Securities Finance Corp, which in turn would be aided by the PBOC. In addition, on Sunday, China state-owned investment company Central Huijin said it had recently been buying exchange-traded funds and would continue to do so.
In response, global debt markets moved considerably on Monday. Australian 3y and 10y bond rates dropped 11bps and 14bps respectively while US and German bond rates also fell considerably in what could be described as a flight to safety out of relatively more risky equity markets.
WBC’s senior international economist, Huw McKay, said it’s not “a threat to the Chinese financial system…the core of the banking system is relatively untouched” as it was securities firms who provided the margin lending. Chinese banks, in theory, are not allowed to lend for stockmarket activities but as the Economist noted recently “many will have, whether knowingly or not, and so will have a new category of bad debts to worry about.”
By the end of last week, yields had returned to where they started the week, although they were still down on the week.