Chinese stocks face sell-off fears as remedial measures fail

Measures designed to provide the market a boost have failed in China, triggering renewed stock sell-off fears.

Beijing is struggling to calm the markets as China's financial woes continue.

Shares were down by more than 8% yesterday (July 27th), and this has been compounded by a 1.7% loss today. The situation has raised concerns about the potential for a market meltdown.

The Chinese government has been quick to respond, the central bank has started running down its foreign currency reserves in an effort to keep the renminbi stable, City AM reports.

Biggest losses since February 2007

The country's State Administration of Foreign Exchange has revealed the renminbi is now being sold at a faster rate than it is being bought, which is putting pressure on the banking system and highlighting the need for foreign inflows. 

Belief in the Chinese financial markets has been wavering over the past few weeks, as many institutional investors have been left underwhelmed by measures brought in to keep equities artificially high. 

For example, some of the country's biggest banks have pumped 1.3 trillion yuan (£134 billion) into the market to boost share investment in recent weeks, but this has failed to stem the tide - yesterday's losses were the biggest during a single day's trading since February 2007. 

Concerns persist about the measures, especially as they come at a time when the country has been trying to encourage more foreign investment by showing a willingness to liberalise its markets. 

Shanghai Composite Index will not fall much lower

Dale Nicholls, a Hong Kong based fund manager at Fidelity Worldwide Investment, described the measures as a "step back" as it involves "sacrificing the long-term story for [the] short term".

Experts think China should devalue the yuan in order to increase competitiveness and ensure it remains in touch with other global markets. But the government is currently trying to be added to the Special Drawing Rights elite basket of global currencies, so this course of action is unlikely.

"China will keep its currency in a tight range for now... This means the economy will continue facing headwinds from the strong currency," said Anna Stupnytska at Fidelity Worldwide Investment.

Despite the poor performance of the stock market, many domestic investors are relaxed about the situation, as they do not expect the Shanghai Composite Index to fall much lower before it starts to recover. 

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