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China Moves to Stabilize Stock Markets; Initial Offerings Halted

HONG KONG — Struggling to respond to precipitous declines on China’s stock markets over the last three weeks, the country’s biggest brokerage firms unveiled a government-endorsed plan on Saturday to buy shares starting on Monday, while both of the country’s stock exchanges suspended all further initial public offerings of stock.

The government-controlled Securities Association of China said that 21 big brokerage firms had agreed to set up a fund worth at least 120 billion renminbi, or $19.4 billion, to buy shares in the largest, most stable companies, and to stop selling shares from their own portfolios. But some experts said the moves might not be enough to stop the hemorrhaging of money from the stock market, particularly given that $105 billion in shares changed hands in Shanghai on Friday.

The association did not specify whether the fund would be allowed to use its initial purchases of shares as collateral to borrow money, probably from the government, and buy more shares. That could give it the leverage to have a bigger effect on the market.

“If it’s only 120 billion renminbi, to be honest, it’s too small,” said Hao Hong, the chief strategist of the Bank of Communications International, the global finance unit of China’s fifth-largest bank. “But if you can add leverage on top of it, that could support the large-cap, blue-chip stocks.”

On Saturday evening, China’s two stock exchanges — in Shanghai and in the far southern city, Shenzhen — issued notices suspending initial public offerings until further notice even for companies that already had provisional approval to list their shares.

Halting initial public offerings encourages investors to keep their cash in existing stock listings instead. The Shenzhen exchange issued suspension notices on Saturday for 18 planned initial public offerings, citing “the recent significant market turbulence” in each case, and Shanghai issued notices for 10 offerings for the same reason.

The announcements came as the government has been scrambling to halt the steepest plunge in the Shanghai stock market in nearly a quarter-century. Share prices have fallen nearly a third since June 12, erasing more than $2 trillion of value and inflicting immediate hardship on millions of families who not only invested their savings but also borrowed heavily at steep interest rates to buy more shares.

The design of the brokerage industry’s fund bore some similarities to the Hong Kong Exchange Fund, a government-run fund that played a crucial role in reversing the fall of the Hong Kong stock market in 1998, during the Asian financial crisis. The fund previously invested the Hong Kong government’s fiscal reserves cautiously in deposits at low interest rates. But when it began buying stocks heavily, it set off a stock market turnaround and produced a large profit for the government.

A statement by the Securities Association of China on Saturday to its members was an odd mix of capitalist and Maoist rhetoric urging them to take collective action to help the stock market.

“Excessively rapid rises and falls in the stock market are not conducive to the stable and healthy development of the market,” the statement said, “and as major players in this market, securities companies must take the initiative to shoulder responsibility, to unify as one, merge our wills and safeguard market stability with all our strength.”

The Securities Association also called on its members to buy back some of their own shares, supporting prices. China’s largest oil companies and big banks, in which the government holds controlling stakes, are widely believed to have used some of their money in the last week to buy back shares, and their shares have fared much better than those of smaller companies.

But the design of the securities industry’s fund, with an emphasis on blue chip stocks, could end up protecting wealthy Chinese and foreign investors much more than the young workers and families all over China who have borrowed heavily in recent months to buy stocks that seemed to be soaring skyward, Hong Kong financiers said. Shares in large companies represent only about 30 percent of the overall value of the Shanghai stock market.

As Chinese stocks soared in the 12 months until their peak on June 12, the small- and medium-size companies with weak financial fundamentals fared the best. Many of them quadrupled, or rose even more, in value, while the overall index doubled because large-cap stocks lagged far behind.

The small-cap and medium-cap stocks overwhelmingly tended to draw middle-class and working-class investors who were buying whatever stocks were rising fastest. The Shanghai market rose 149 percent in the year until June 12. By comparison, a stock price index of 100 large mainland Chinese companies that are traded in Hong Kong — and many of them in Shanghai, too — rose 24 percent over the same period.

Hong Kong sets tougher listing rules than Shanghai to reduce fraud, and also keeps closer controls on trading with borrowed money. Official statistics suggest that loans to investors for stock purchases climbed ninefold in mainland China over the last two years and were supplemented by widespread lending by informal financial companies at annual interest rates exceeding 20 percent.

The bailout funds could also end up helping big state-owned enterprises at the expense of smaller businesses, which tend to be in the private sector. President Xi Jinping and Prime Minister Li Keqiang have spoken of their desire to increase the role of the private sector to improve the efficiency of the Chinese economy.

Other officials have even hinted at selling more shares in state-controlled enterprises on stock markets — the reverse of what now seems to be happening, as state-controlled companies use part of their cash reserves to buy back shares from the public.

Hours after the securities industry’s statement, the government-backed Asset Management Association of China gathered representatives from 25 mutual fund companies, who announced plans to help shore up the stock market by speeding the issuance of funds investing in equities. But the association did not introduce its own market stabilization fund like the brokerage industry, contrary to initial reports on Chinese social media that it would do so.

Another worry lies in whether many Chinese mutual funds and other investment funds may be required to liquidate suddenly. Many of these funds have rules on losses in the underlying contracts that formed them: If the value of the fund falls 30 percent, it must return the remaining money to shareholders, typically by cashing in all of its shares.

With the Shanghai stock market down 28.6 percent since June 12, that rule is starting to appear to be a possible risk to the broader market, Mr. Hong said.

A version of this article appears in print on  , Section A, Page 8 of the New York edition with the headline: China Moves to Stabilize Plunging Stock Markets; Exchanges Halt I.P.O.s. Order Reprints | Today’s Paper | Subscribe

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