TAIPEI, Taiwan (TheStreet) -- China's more aggressive steps to halt the sharp drop in stock prices triggered a rally on Monday, but it's unclear just how effective the measures will be over the long-term.
After taking a largely hands-off approach, China's stock market regulator moved over the weekend to reassure investors rattled by the market's 27% drop over the past month.
Among the steps, China's central bank funneled more money into the state-owned China Securities Finance Corp., which provides margin loan services to brokerages. The intent was to make the brokerages less likely to call in loans to the masses of mom-and-pop Chinese investors who have pushed the stock market 150% higher over the past year.China's top 21 securities brokerages also pledged to invest "collectively" $19.3 billion in exchange-traded funds that track large blue chip stocks, official Chinese media said Sunday.
Stocks reversed course on Monday, with the benchmark Shanghai Composite Index gaining 2.4%.
"The rescue package is targeting the right thing, and in principle it could work," said Tim Condon, Singapore-based Asia head of Research at ING Financial Markets. "If (brokers) are worried their margin loans aren't going to be rolled over, and if that fear is taken away, then the pressure stops and it becomes self-reinforcing."
But like other stock-propping measures attempted since the benchmark Shanghai Composite Index began declining, support for margin trading might do little or nothing over the longer term, especially as investors widely suspect the market had reached bubble proportions on unrealistic valuations.
Among the other measures, IPOs have been deferred for 28 firms, in theory diverting some capital back to the broad market, and authorities have cut loan-to-deposit ratios as well as interest rates to increase liquidity.
"They're throwing a lot of policy changes at the market, yet the market has not responded that well," said Michael McGaughy, head of research with Yuan Asset Management in Hong Kong. "It pops up for a day, but at the end of the day the market's the market."
If the state's stimulus worked, China's "A" share bear market would rise again and investors could profit by parking money in the market now when prices are cheap due to losses since June 5. American investors cannot pick "A" shares but may invest in the mutual funds of institutional investors with Chinese government quotas. Among the institutions with "A" share funds are The Hongkong and Shanghai Banking Corp. (HSBC) and Morgan Stanley (MS - Get Report).
Overseas investors can also buy into exchange-traded funds such as the China All-Cap ETF (YAO) issued by Guggenheim Partners and Van Eck's Market Vectors China ETF (PEK - Get Report). Some Chinese firms, for example China Construction Bank Corp. (CICHY), trade both "A" shares and easier-to-get American depositary receipts in the United States.
But suppose the rescue plan cannot lift the market, or that Chinese regulators go back to their previous course of curbs on margin lending rather than more support for it. The rescue plan might flop if it just gives investors a new way to accrue margin debt in a market already saddled by debt, said Jack Perkowski, managing partner of merchant bank JFP Holdings in Beijing.
Uncertainty about the rescue or the market's overall direction might push prices even lower. Investors would need to detect when prices have reached an attractive market value where they might turn around.
"Whether the (rescue) plan succeeds depends on whether the market reacts," said Wu Hsiao-ju, China stocks analyst with SinoPac Securities in Taipei. "Of course we hope prices could be lower. The main point is to see which price range is the most comfortable for buying."