Chinese Officials, Investors Hope New Support Steps Will Stave Off Stock Crash

China's stock markets may be facing a make-or-break week after officials rolled out an unprecedented series of steps at the weekend to prevent a full-blown stock market crash that could threaten the world's second-largest economy.

The government is anxiously awaiting the market opening on Monday to see if the new measures will halt a 30 percent plunge in the last three weeks, or if panicky investors who borrowed heavily to speculate on stocks will continue to sell.

An online survey by fund distributor eastmoney.com over the weekend, which polled over 100,000 individuals, said investors believed stock indexes would rise over 5 percent on Monday. But many of those polled don't think the bounce will last long.

“You’re going to need the central bank to open the floodgates to take us back to 4,500 points in Shanghai,” said an investment manager in Shanghai.

The Shanghai Composite Index was last at 4,500 on June 25, and is now trading 22 percent lower. [.SS]

China stocks had more than doubled in just 12 months even as the economy cooled and company earnings weakened, resulting in a market that even China's inherently bullish securities regulators eventually admitted had become too frothy.

But the slide that began in mid-June, which the China Securities Regulatory Commission (CSRC) initially tried to downplay as a "healthy" correction after the fast run-up, has quickly shown signs of getting out of hand.

A surprise interest-rate cut by the central bank last week, relaxations in margin trading and other "stability measures" did little to calm investors, who sent shares down another 12 percent in the last week alone.

China's top leaders, who are already struggling to avert a sharper economic slowdown, seem to be losing patience.

FLURRY OF STEPS

In the first of a series of announcements on Saturday, China's top brokerages pledged that they would collectively buy at least 120 billion yuan ($19.3 billion) of shares to help steady the market, and would not sell holdings as long as the Shanghai Composite Index was below 4,500.

Later, the government also appeared to slam the brakes on the CSRC’s push to allow more companies to sell shares, which has threatened to dump even more supply on the market.

Twenty-eight companies which CSRC had approved to list shares all announced they had suspended their plans for initial public offerings (IPOs).

The u-turn is consistent with past IPO freezes in China when share markets were falling sharply, though they are usually spun as spontaneous company decisions, not as government directives.

Respondents to the eastmoney.com survey thought news of an IPO slowdown or freeze would be the most welcomed on Monday.

Late on Sunday, China state-owned investment company Central Huijin said it had recently been buying exchange-traded funds and would continue to do so.

The combined effect of the policies is to signal to China’s army of retail investors, who conduct around 85 percent of share transactions, that the government is now standing behind the stock market. But it is unclear whether even this will be enough to put a floor under prices or revive the rally.

Li Feng, a trader at Fortune Securities, said the amount of money that brokerages and fund managers vowed to put into the stock market is tiny compared with the size of leveraged positions still waiting to be unwound.

Some analysts suggest total margin lending, both formal and informal, could add up to around 4 trillion yuan.

Samuel Chien, partner of Shanghai-based hedge fund BoomTrend Investment Management Co, said he's ready to pile into blue-chip stocks this week, betting the new steps would trigger a rebound.

"Main indexes will rise. For the Shanghai Composite, the area below 4,500 is relatively safe now," Chien said. "I have ample cash at hand, and surely will buy stocks this week."

But that perceived guarantee is a double-edged sword for regulators, given that many investors are just holding on long enough to cut their losses and leave the market.

People like Shao Qinglong, a public service worker who has already lost over a quarter of his capital investing in stocks, told Reuters all he is waiting for is for the market to recover enough for him to break even.

"I didn't sell at the peak because people all say the market will rise beyond 6,000 points," Shao said. "I'm now waiting for the market to rebound so that I can get out."

(Editing by Kim Coghill)