Quick government reaction to meltdown stabilised Chinese stocks

A recent stock market meltdown in China had wiped out about a third of market valuation in less than a month, but fast government reaction to the fluctuations rapidly stabilised the market, Xinhua reported.

"Recent turmoil should be seen as a sharp fluctuation rather than a sharp decline because Chinese stocks remain in a positive territory given the 12-month stock moves though the market plunged temporarily," said Jee Mansoo, a researcher at Korea Institute of Finance (KIF) in Seoul.

The volatility would have a limited impact on the world's second-largest economy as it was a one-off fluctuation, Jee said.

China's second-quarter GDP expanded seven percent on an yearly basis.

China's Shanghai composite index plunged 8.5 percent to settle at 3,725.56 on Monday, but it could be within an extended range of recent corrections.

"There is no one who cast doubts on the long-term growth of the Chinese economy. Capital power of Chinese investors gets stronger, and many investors are looking at the long-term growth potential," said Kwak Joong-bo, former stock analyst at Samsung securities who became a professional investor two years ago.

At its peak on June 12, the domestic A-share market's total capitalisation came to 29.1 trillion yuan, about 80 percent of which were held by individual investors.

"It's good for stock investors to have the government on their side," said Han Jae-jin, a senior research fellow at Hyundai research institute in Seoul.

Chinese authorities had rolled out several measures to stabilise the market, preventing the stock market rout from spilling over to the overall financial system. It included pouring in funds backed by the central bank, easing rules for insurers to invest in blue-chips and asking major securities brokers to spend billions of dollars on stock purchase.

Risky leveraged positions in China's stock market fell sharply after the government action, reducing margin debts by 37 percent to 1.4 trillion yuan, or 7.1 percent of total market capitalisation, according to a July 13 Goldman Sachs report.

The stock market rout would become a great opportunity for China if the government seeks to systematise and regularise stabilisation measures, Han said.

Such regularised emergency plans, which can be drawn up by Chinese regulators and agencies each, would enhance market soundness and raise confidence among investors.

"It's better for stock investors to have the government seeking to prepare regular safety tools against emergency situations like the recent plunge."