China considers equity purchase plan

China’s State Council will soon decide on how to institute a plan to put together a multi-billion dollar fund for the purpose of purchasing equities.

A senior Chinese official said Friday that the fund, resembling a plan that Hong Kong used to rescue its stock market during the 1998 Asian financial crisis, would not be to bail out the market but instead to restore confidence in it.

The official pointed out that Hong Kong made a large profit when it sold the shares it had bought after that crisis had eased.

The fund is one of several measures put together by the People’s Bank of China with the goal of pumping new life into China’s markets.

Recent declines in the markets at Shanghai and Shenzhen as well as investor discontent over plans to reduce government holdings in listed companies have produced new interest in the plan, which has been in the discussion stages for more than a year.

The Shanghai composite index declined by 15 percent last year and is down sharply this year even though China’s economy is strong.

While many analysts see the plan as crucial to China’s markets, share prices are down over uncertainty about how the plan willwork and fears that the market will be flooded with new shares.

In addition to purchasing shares, the People’s Bank of China will also loan money to brokerages. While the government acknowledges the risks of making the loans in terms of making the brokerages dependent, it justifies the loans by citing the liquidity problems of brokers. The China Securities Industry Association says that losses of 114 of 130 brokerages in 2004 stood at Rmb15 billion ($1.8 billion).

Discuss this in the Finance Markets forums

Story link: China considers equity purchase plan