The Wall Street Journal: China Seeks to Lift Market by Raising Stake in Major Banks

SHANGHAI -- China's government announced plans to buy shares and take other measures to support the nation's plummeting stock market, a program that analysts said will surely boost investor sentiment -- but could add to longer-term risks.

As the world's major central banks banded together Thursday to fight a meltdown in global financial markets, Beijing said an arm of China's $200 billion sovereign-wealth fund will increase its shareholding in the nation's three largest banks with direct purchases on the market, while other government entities will be encouraged to load up on stock in listed companies that they control. In addition, authorities canceled a 0.1% tax on stock purchases, although sellers will still have to pay the tax.

Already the principal shareholder in China's three largest banks, Central Huijin Investment Co. will buy additional stock in Industrial & Commercial Bank of China Ltd., Bank of China Ltd. and China Construction Bank Corp., according to the state-run Xinhua news agency. The report said the buying began Thursday and aims to "shore up their share prices amid stock market slumps." No specifics on the planned purchases were announced.

"It is absolutely a market-rescuing message from the government," said Mao Nan, a strategist at Orient Securities Co. in Shanghai.

The announcement came as central banks around the globe flooded money markets with U.S. dollars, and on a day when other Asian governments were taking more technical and less blunt steps than China to support their financial systems -- for example, by adding local currency to their own money markets. Using similar monetary policy options in China, like this week's first lowering of interest rates in six years, would have limited impact on China's economy given the immaturity of its financial system.

By buying shares directly, Beijing will employ its most powerful tool to halt a painful market decline that has erased 64% this year from the benchmark Shanghai Composite Index. The move, which wasn't coordinated with any outside authorities, also marks what may be a last chance to resuscitate the confidence of tens of millions of investors -- and appears to reflect a recognition in Beijing that its strategy to carefully phase in market-oriented policies hasn't convinced the public that stocks are a suitable place to put their $4 trillion in savings. The Shanghai Composite Index fell about 70% from last year's all-time high of 6124.04 to Thursday's low point of about 1816.

The purchases will deepen China's government ownership of a market that by some estimates is still about two-thirds controlled by state interests. That state of affairs threatens to sustain a decade-long fear that big shareholders will ultimately dump their stock -- a factor that many blame for this year's collapse and a previous grind earlier in the decade that erased more than 40% of market value.

It is unclear whether the stock-market intervention suggests Beijing will suspend its hunt for investments overseas -- up to now the major focus of the country's sovereign wealth fund. Chinese entities haven't entered the fray to shore up Wall Street firms in recent weeks. Still, even as the market bailout was being announced on Thursday, Bank of China said it would pay 2.3 billion yuan ($336 million) to buy about 20% of Cie. Financière Edmond de Rothschild, the French arm of the LCF Rothschild Group headed by Baron Benjamin de Rothschild.

The U.S. government's recent massive bailouts of American financial companies have provided ammunition to those calling for official stock buying by Beijing. Chinese policy makers had debated for months whether to pull the trigger and buy shares, a person with knowledge of the situation said Thursday. For much of the year, proponents of freer markets appeared to be winning with their argument that authorities shouldn't target price levels. They advocated instead building a credible trading system of fair rules, robust infrastructure and trustworthy participants that would make the stock market a base on which to build a fuller financial system.

But as the market rout continued, Beijing's credibility was on the line. Investors, who had opened more than 100 million trading accounts, said the market's biggest investor -- the government -- had a duty to defend it.

As part of the new effort to boost stocks, the central-government entity that indirectly controls a vast array of major state-owned companies indicated Thursday that repurchases of shares in listed companies would soon begin. Among the companies in its stable is oil giant PetroChina Ltd., the largest stock on the Shanghai exchange.

Gao Lingzhi, an analyst at Great Wall Securities in Shenzhen, said if the market doesn't sustain the now widely expected rally when government entities start buying stocks, investors will clamor for more support.