Worry spreads on sinking Chinese stock market

Chinese officials are scrambling to stop a plunge in the country’s stock market, shutting down half of its market from skittish investors and forcing brokerages to pony up billions to prop up shares.

The Shanghai composite had lost big and is now down more than 30 percent since peaking on June 12.

The impact on Chinese investors is direct, but for investors in the United States, Europe and elsewhere, it’s not as simple. China’s market is largely isolated from other world exchanges, but there are worries the financial damage could hurt the broader Chinese economy, which is the second largest in the world.

There have been signs of overheating in China for a while. Shares in Shanghai more than doubled over the past year, despite evidence the Chinese economy is slowing. Chinese economic growth fell to 7 percent from January through March, the slowest quarter since 2009. At the same time, state-owned media have encouraged ordinary Chinese for months to load up on shares. Many borrowed heavily to buy stocks, taking out so-called margin loans. Rising stocks encouraged companies to raise money by issuing shares and to use the proceeds to pay down debt. In the first half of the year, the Shanghai stock market led the world in initial public offerings: 78 companies issued shares in Shanghai, raising $16.6 billion, according to a study by accounting firm EY. Hong Kong was No. 2 with 31 deals that raised $16 billion. Shenzhen was No. 5 with 112 deals that raised $7 billion.

Now analysts say the flood of new shares is overwhelming the market and helping to push prices down. Moreover, the government began to worry the market had reached dangerous levels, and Chinese regulators have started to tighten rules on margin lending.

After hitting a peak last month, Chinese stocks have been in freefall. Originally, investors in China and abroad treated the selling as a much-needed release from a market that had soared 150 percent over the past year.

As the losses have deepened, though, worries have increased and officials have taken direct action to stem the selling. Over the weekend, 21 Chinese brokerage companies announced they would create a $19-billion “market stabilization” fund, and would continue to buy Chinese stocks. Any companies who were going to go public suspended their plans.

The selling continued, so Chinese officials announced that major shareholders in companies and executives were banned from selling their holdings for six months.

It has actually made things worse. The selling has not stopped, and now it is affecting Asian markets like Hong Kong and Japan. US stocks also fell sharply.

Most anxiety-ridden investors have turned to purging stocks that act as a proxy or have direct exposure to China, with most of the damage happening in Hong Kong. The territory’s Hang Seng index dropped 5.8 percent last Wednesday, its worst one-day drop since the financial crisis. The Hang Seng China Enterprise Index, which is an index of so-called H-Share companies, or mainland Chinese companies that trade in Shanghai and Shenzhen as well as Hong Kong, fell 6.1 percent.

The exposure that US investors have directly to Chinese stocks is limited. Outside investors have only been able to access the Chinese stock market since October, and that required purchasing stock in Hong Kong. To buy directly in the Chinese stock market required a special license.

The lack of access has made it difficult for investors, including US fund managers, to get exposure to the Chinese stock market.

For example MSCI, a company that publishes stock indexes, made a decision last month not to include Chinese “A’’ shares, or stocks traded on the mainland, in its global indexes. MSCI largely cited the lack of access for foreign investors to China’s market as the reason to continue to keep China out of its indexes. AP