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China’s Efforts Fail to Contain Market Plunge

A brokerage house in Shanghai. At least a third of the companies listed on the major stock exchanges in China had trading in their shares suspended Wednesday.Credit...Aly Song/Reuters

SHANGHAI — As the Chinese stock market slumps, the country’s government has stepped in boldly, unveiling a series of measures to prop up shares. But those efforts have done little to stabilize the market, with stocks continuing to slide on Wednesday.

The losses create a political and economic challenge for the nation’s leadership.

Beijing could face social unrest if the sell-off accelerates, since tens of millions of ordinary investors have plowed their savings into the market. The psychological toll on investors, in turn, could erode consumer confidence, dragging down growth in the already slowing economy.

“The stock market is connected to the real economy,” says Fraser Howie, a longtime Asia banker and co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.” “When you see such violent moves, you don’t know what kinds of ripples are going to come down.”

The Chinese government is moving swiftly to prevent any broader fallout.

The country’s central bank has made extra cash available to fund share purchases. Brokerage houses have been ordered to pump billions of dollars into the market. And government-backed funds have earmarked billions more to prop up the shares of flagging companies.

The mess in China has not roiled global markets. That is partly because the “Chinese financial system is largely sealed off from the global financial system,” Derek Scissors, an analyst at the American Enterprise Institute, said in a report.

For now, the action is domestically focused. China’s Communist Party leaders are trying to restore confidence and stabilize the market before things get too ugly at home, introducing new fixes nearly every day. On Wednesday, China’s Ministry of Finance pledged to “adopt measures to safeguard the stability of capital markets,” and in particular protect state-owned financial enterprises. The move signals that this broad-based effort is being directed from the very top echelons of the state.

“There are no buyers, only sellers,” said Francis Cheung, a market analyst at CLSA, the brokerage house. “So the government is buying, and they’ll ramp up buying to stabilize the market.”

Trouble is, they haven’t found the right formula. Despite the latest batch of moves, China’s markets were battered on Wednesday. In Shanghai, prices plunged 5.9 percent. In Shenzhen, they fell 2.5 percent. The damage is also spreading regionally, to Hong Kong and Japan, where shares also fell sharply.

While the markets are up over all for the year, the recent downward spiral is creating substantial pain. Both major exchanges are off between 30 percent to 40 percent in six weeks, putting them in bear market territory.

The numbers don’t give the complete picture either. In recent days, many stocks have been halted because of exchange rules that are supposed to guard against too much misery in a single trading session. At least a third of the companies listed on the major stock exchanges had trading in their shares suspended on Wednesday.

Those market dynamics can create a chain reaction of selling. China’s major exchanges prevent a stock from falling more than 10 percent on any given day. When that happens, analysts say, many investors opt for selling other shares, broadening the sell-off. Then when the market opens the next day, they continue selling down the stock that was previously halted, effectively prolonging the turmoil.

“It just delays the correction, so it delays the downturn,” said Mr. Cheung at CLSA.

While China’s stock markets have a long history of volatility, the environment is different now. The country’s economy has been sluggish. The stock market is far bigger than it has ever been, second in size only to that of the United States.

And aggressive investors, many of them first-time buyers of equities, have been playing a different game. They were buying stocks with borrowed funds, using leverage as if they were “barbarians at the gate.”

The panic, in part, is being driven by concerns about the huge amount of borrowing. Some analysts estimated that margin buying reached about $550 billion, or as much as 15 percent of the value of all tradable shares on the two major exchanges.

Fear is gripping the market after a phenomenal bull run in which mainland China’s major stock indexes doubled, tripled and even quintupled over the past few years. By the time the market peaked, in early June, share prices in China were among the most expensive in the world, vastly costlier than in the United States, Europe or Hong Kong.

Investors in mainland China, in other words, had to pay a huge premium to buy domestic shares, a sign the country’s stock market was frothy. Some analysts have noted that the price-to-earnings ratio of companies listed on China’s start-up index, called ChiNext, were far higher than those listed on the Nasdaq stock market in 2000, when the Internet bubble burst.

Just a few weeks ago, the pipeline of initial public stock offerings was robust. There was the promise of innovative companies that could use the capital markets, rather than the banks, as a source of cash, and the prospect of new bourses being set up for China’s technology start-ups.

China’s state-run news media, including The People’s Daily, helped hype the rip-roaring market. As recently as April, news media said that the bull market had “just begun,” only to warn some weeks later of the risks.

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Stockbrokers in Hong Kong on Wednesday. The Hang Seng index fell 5.8 percent.Credit...Jerome Favre/European Pressphoto Agency

Since then, sentiment has soured, and investors have lost confidence. The worry, analysts said, is that it could be a prolonged downturn, like the one that began in 2007 and lasted about seven years.

The sharp decline in prices wiped out trillions of dollars in value from a market that at one point topped $10 trillion. Still, the decline has not yet erased all, or even most, of the gains. China’s major exchanges remain up about 75 percent from a year ago, in part because big state-owned companies have fared better.

In late June, the government cut interest rates, which is ordinarily a good sign for stocks, since it makes them more attractive relative to bank deposits. But share prices fell anyway.

Since then, the authorities have introduced a wave of additional measures meant to prop up prices. Stock trading transactions were slashed. I.P.O.s were suspended. Huge stabilization funds were set up to purchase shares. Brokerage houses promised to buy more. And China’s insurance regulator eased rules so that insurers could more easily invest in stocks.

In the face of further selling, the government continued to introduce new measures on Wednesday.

China’s State-Owned Assets Supervision and Administration Commission, which oversees the country’s big state corporations, ordered many such companies with public listings not to reduce holdings of their own stock.

The China Securities Regulatory Commission even issued a notice encouraging major shareholders, directors and executives of companies to increase their holdings of their companies’ stock. The commission emphasized that rules about the timing of insider stock transactions that might deter such purchases would not apply.

It’s a “trial and error” approach, said Patrick Ho, a market analyst at UBS in Hong Kong. And more measures could come, as the authorities look to stimulate the economy and try to keep the market from falling too rapidly.

Chris Buckley contributed reporting from Hong Kong.

A version of this article appears in print on  , Section A, Page 1 of the New York edition with the headline: China’s Efforts Fail to Contain Market Plunge . Order Reprints | Today’s Paper | Subscribe

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