Why China is so afraid of the market fall

HONG KONG: As China's stock market plunged in recent weeks, Communist Party leaders moved quickly to intervene. What were they so afraid of?

Government moves included a halt in initial-public offerings, setting up a stock-buying fund of $19.3 billion and a ban on stateowned companies selling shares of listed units. Even the Public Security Ministry got involved: it's now probing cases of what it called "malicious" short selling.At first, the moves appeared to have little effect, and stocks con tinued to slide. The past two trading days have told a different story as the Shanghai composite jumped 5.8 per cent Thursday and then closed 4.5 per cent higher Friday. Hang Seng Index rose 2.1 per cent.Here are some reasons Chinese leaders may have decided they had no choice but to take action.

Raising capital: Companies saw an opportunity to raise money on the market as stocks rose. The subsequent rout threatens at least $154 billion in share sales that would have helped them finance new investment and ease a mounting debt load.

Political stability: As the market doubled from 2,500 in Decem ber, state media added to the fervor. "At the 4,000 level, the Shanghai index is just at the start of the bull market,"the People's Daily said April 21. Such pronouncements may leave China's 90 million individual investors feeling betrayed and questioning the Communist Party's ability to steer the economy.

Protecting the broader economy: Plunging shares prices may prompt Chinese consumers to rein in spending. Everbright Securities chief economist Xu Gao estimates an equity slump could cut 0.6 percentage point from GDP growth if followed by a pullback of financial activity. Currency stability: A massive stock market correction could lead to bigger capital outflows and make the yuan more volatile.The prestige factor: Since coming to power in 2012, President Xi Jinping has sought a greater global role for China, pressing ahead with an infrastructure bank that rivals existing institutions and pressing China's claims in the South China Sea. Xi has also taken responsibility for the economy by appointing himself to lead two key policy committees. A collapsing stock market could undercut Xi's argument that China deserves more say in global affairs.