Shanghai stocks down in afternoon, wiping out gains

Shanghai (AFP) - Shanghai stocks erased a near eight percent gain in volatile trading on Monday, as an unprecedented raft of measures announced over the weekend failed to boost the slumping market.

The benchmark Shanghai Composite Index lost 0.55 percent, or 20.32 points, to 3,666.60 as analysts questioned whether a 7.82 percent rally at Monday's open was sustainable.

The Shenzhen Composite Index, which tracks stocks on China's second exchange, plunged 4.73 percent, or 99.31 points, to 1999.17. It had opened 6.55 percent higher.

The Shanghai market -- which is partially insulated from the global financial system and was not focused on Greece Monday -- had plunged almost 30 percent over the three weeks to Friday, prompting the government to intervene over the weekend.

On Sunday, the government said the central bank would provide funds through the state-backed China Securities Finance Co. to "protect the stability of the securities market", according to exchange watchdog the China Securities Regulatory Commission (CSRC). It gave no amount but state media said the funds would be used to "revive" the market.

The CSRC also said on Sunday that there would be no initial public offerings (IPOs) "in the near future", according to a separate statement. State media said 28 companies whose flotations have already been approved would postpone them.

Chinese regulations mean new share issues offer near-guaranteed profits and so drain funds from the rest of the market, hurting prices and sentiment.

On Saturday, China's 21 largest brokerage firms announced they would invest at least 120 billion yuan ($19.3 billion) in so-called "blue chip" exchange traded funds (ETFs).

"The funds have not entered yet, so the upward momentum did not hold," Haitong Securities analyst Zhang Qi told AFP.

"Some of the short-selling forces still remain... short-sellers are targeting small company stocks," he said. Short-selling refers to the selling of a financial instrument which an investor does not hold, in anticipation of a fall in prices.

- 'Knee-jerk reaction' -

The measures came after other actions last week -- including an interest rate cut, relaxed rules on margin trading, and proposals to let the state social security funds invest in equities -- failed to arrest steep declines.

Margin investors only need to deposit a small proportion of the value of their trade, potentially generating bigger profits but also exposing themselves to bigger losses.

"This type of state-led market-saving has never been seen before, even when the market crashed during the last financial crisis," Zheshang Securities analyst Zhang Yanbing told AFP, referring to the global economic meltdown of 2008.

Analysts questioned whether the sharp rises in Chinese shares over the past year were sustainable.

Until last month mainland Chinese markets were among the world's best recent performers, with Shanghai rising more than 150 percent in a spectacular borrowing-fuelled bull run in the 12 months to its top on June 12.

"The market may show a knee-jerk reaction to the measures but I am not sure how sustainable it will be," Ronald Wan, Hong Kong-based chief executive officer of Partners Capital International, told Bloomberg News.

Analysts say China needs to move towards a more market-oriented economy, instead of more heavy-handed government measures represented by the stock market bailout.

Leaders declared in 2013 that the market would play a more "decisive" role in the world's second largest economy. Proposed reforms include reforming the IPO system to allow the market instead of the CSRC to determine which companies offer shares.

"These (stock market) measures are meant for short-term fix, but can't address the fundamental problems facing China?s equity and financial system," ANZ Banking Group said in a research note.