China Halts the Free Fall in Stocks, but for How Long?

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.

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