Beijing admits stock bubbles, says routs almost over

BEIJING - China's central bank governor and its market regulator have admitted that there were "bubbles" on the country's stock exchanges, after a spectacular rally was followed by a painful bust, but said the turbulence was coming to an end.

The benchmark Shanghai Composite Index soared more than 150 percent in the year to June 12, fuelled by debt rather than fundamentals and encouraged by authorities.

It has since plummeted nearly 40 percent, with official interventions to the tune of hundreds of billions of dollars failing to arrest the declines.

People's Bank of China (PBoC) Governor Zhou Xiaochuan pointed to the March-June period in particular, when the Shanghai index leaped 70 percent.

"Bubbles continued to build up until mid-June," he told a G20 meeting of finance ministers and central bank governors in Ankara at the weekend, according to a statement on the PBoC website.

"Since mid-June, three rounds of corrections took place in China's stock market," he went on. "The first two did not have international impact, while the third one in late August (had) some global influence."

Chinese bourses are largely separated from the rest of the world's financial system by limits on investment from overseas. But news last week of a contraction in an official gauge of Chinese factory activity sent domestic and world markets into a tailspin on worries the economy was headed for a "hard landing".

"The correction in the stock market has now come close to an end," Zhou said in the statement, refraining from using the word "burst" and adding the Chinese economy was not "much affected" by the rout.

The market regulator, the China Securities Regulatory Commission (CSRC), echoed his comments in a statement on Sunday.

"Gains on the stock market had been too rapid and large, forming stock market bubbles, therefore subsequent plunges and adjustments were inevitable," it said.

"At present, market risks and bubbles have been released to some extent," it added.

Analysts estimate the Chinese government has spent hundreds of billions of dollars to prop up stock prices, including funding state-backed China Securities Finance Corp. (CSF) to buy shares.

But investors worry the government will wind down its intervention, given the huge cost for little effect, and the market's limited impact on the real economy.

The CSRC sought to reassure traders, saying: "When fierce and abnormal volatilities take place in the stock market and may trigger systemic risks, the government will absolutely not sit back.

It promised "decisive and multiple measures to stabilise the market", adding the CSF will "continue to play a stabilising role".

"Market transactions are basically normal and the liquidity is ample," it added.

The CSRC also said it was mulling an index "circuit breaker" system to suspend trading if the market fell substantially.

Chinese shares are already limited from falling more than 10 percent in a single day.

The benchmark Shanghai Composite Index ended the morning session in positive territory on Monday, rising 0.87 percent, or 27.65 points, to 3,187.82.

AFP