News Analysis: Fast reaction to meltdown stabilizes Chinese stocks rapidly

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 stabilized the market, researchers here have said.

"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 research fellow 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 added. China's second-quarter GDP expanded 7 percent on a yearly basis.

China's benchmark Shanghai Composite Index tumbled more than 30 percent to 3,373.54 on July 9 after peaking to 5,178.19 on June 12. After swinging between gains and losses, the market rapidly got back to a stable track on the back of government support measures, to close at 4,070.91 on Friday.

The Shanghai index plunged 8.5 percent to settle at 3,725.56 Monday, but it could be within an extended range of recent corrections. "There's 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 capitalization came to 29.1 trillion yuan (4.76 trillion U.S. dollars), 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 stabilize 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 (229 billion U.S. dollars), or 7.1 percent of total market capitalization, according to a July 13 Goldman Sachs report.

"Government measures prevented the risky leveraged investment. If it were not blocked right away, it must have caused a bigger debacle," said Han.

The stock market rout would become a great opportunity for China if the government seeks to systematize and regularize stabilization measures, Han said. Such regularized emergency plans, which can be drawn up by Chinese regulators and agencies each, would enhance market soundness and raise confidence among investors, he noted.

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