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Fear of backlash pushes China to crack down on frothy markets

Authorities hope to head off possible bubbles in the stock and metals markets

China's government worries that if retail stock investors suffer in a financial bubble collapse, the blame will fall on Beijing.   © Reuters

SHANGHAI -- Chinese officials are clamping down on speculative stock and metal trading on fears that investor anger in the wake of any financial collapse would stoke discontent with the government.

Industrial and Commercial Bank of China, a major state-owned lender, notified customers at the end of July that it would cease setting up new accounts for financial products linked to platinum and palladium prices.

The move was in response to wild price fluctuations and the need to take preventative controls against trading risks, the bank said. Other banks have taken similar action.

"This is what the authorities wanted," said a sales manager at a large bank.

Prices of precious metals for industrial use slumped in early spring, when the coronavirus pandemic reached a global scale. Later on, precious metals rose across the board. Platinum, which had sunk to $600 per ounce in March, now fetches over $900.

Housing was once the asset of choice for speculative investors in China. But in most Chinese cities, home values have risen by only single-digit percentages in a year. Many retail investors and business people have gone after stocks and products with higher price volatility.

The trend has frayed the nerves of financial watchdogs. Just this April, the Bank of China endured a public relations emergency when its petroleum futures product -- called Yuan You Bao, or "crude oil treasure" -- caused as much as $1.4 billion in losses for ordinary investors. This experience put Chinese authorities on edge.

On April 20, U.S. futures prices sank into negative territory for the first time in history. The Bank of China offered partial compensation to victims, but angry investors still sued the bank in multiple jurisdictions.

A client desk at Chinese brokerage Guotai Junan Securities. (Photo by Yusho Cho)

The loss of hard-earned money by mom-and-pop investors could potentially lead to a firestorm of criticism against President Xi Jinping and the Politburo. During the 2015 and 2018 stock market slides, investors aired their displeasure at stock brokerage branches and online.

On the other hand, the government has no choice but to prop up the economy through monetary easing since overseas demand has dropped amid the pandemic. China's total social financing, a broad measure of the credit and liquidity provided to the real economy, rose 12.9% on the year at the end of July to 273 trillion yuan ($39.4 trillion).

Now concerns have shifted to Chinese equities, which touched the highest level since February 2018 during Tuesday trading in Shanghai. The China Securities Regulatory Commission unveiled a list of roughly 270 companies that  improperly provide financing for margin trading behind the scenes, with the body indicating that it will crack down on the practice.

Multiple suspect outfits have appeared to advertise offers of 10 times leverage, according to state media. These actors come into contact with investors through WeChat and other social media platforms, which turns the hunt for offenders into a game of whack-a-mole.

But the pace in growth of the Shanghai Composite index did in fact start slowing last month, indicating that the enforcement actions may have had some impact.

The government wants to avoid a large correction in equity prices. As frictions flare up with the U.S., China is busy drawing major companies to stock markets on the mainland and in Hong Kong. Alibaba Group Holding's financial arm Ant Group said it will embark on a double listing in Hong Kong and Shanghai, which could raise $30 billion in total.

That amount would beat the all-time high achieved by Saudi Aramco's $25.6 billion initial public offering. To realize that feat, a healthy financial market is a must. Chinese authorities will continue to take on the delicate balancing act of guarding against sharp price swings while managing expectations toward a sober bull market.

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