New China share price crash no surprise, says ANZ

BEIJING - China's A-shares dropped sharply yesterday by 8.5% to close at 3,903 – but ANZ Bank says the market movement is not surprising. “The sharp fall has been propelled by a rapid deleveraging process triggered by tightening of margin financing pledged mainly by securities brokers and to some extent informal credits created through unregulated trading platforms,” ANZ says.

“Since the securities regulator is still tightening up such activities, the stock market will continue to be very volatile, despite the high-profile rescue package launched by the Government in the past few weeks.”
ANZ says that it does not, however, regard the price movement in equity markets as a financial crisis. “The banking sector dominates China’s financial sector but the spill-over effects to the banking sector remain containable,” it says.
“Our initial assessment is that the risks are still confined within the securities market. According to PBoC data, equity investment as a stated purpose of loan pledges by commercial banks represents about 6% of banks’ balance sheets. Mark-to-market loss due to 30% drop in share prices should be limited within 2% of total balance sheets. 
“That said, the stock market volatility does present some downside risks to China’s growth outlook. In H1, the vibrant financial market contributed about 23% or 1.6ppts of the 7% GDP growth rate, given the 17% y/y gain of value-added by the financial sector. Depressing stock prices would also affect households’ spending appetite for durable goods.
“If policymakers fail to shore up investor confidence in time and financial market activities become depressed in H2, China will unlikely attain 7.0% growth. While we maintain our 2015 GDP forecast of 6.8%, the downside risk to our forecast has risen.
“Given this macroeconomic backdrop, the equity market rout provides room for the PBoC to ease monetary policy, which should be seen as growth positive.” www.live.anz.com (ATI).