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HomemarketsHow long can China's 'Rescue Squad' keep intervening?

How long can China’s ‘Rescue Squad’ keep intervening?

One month after mainland equities started their sharp selloff, Chinese investors continue to look to the government to help stabilize markets—but just how long can officials maintain their support?

Volatility in Shanghai and Shenzhen stocks subsided on Wednesday after a rough start to the week. Tuesday saw markets swing wildly between gains and losses following a precipitous 8 drop on Monday. This week's declines has been put down to local media reports that the government may withdraw the market support measures it announced in the last bout of seesaw trading in June.

But fresh confirmation that officials would remain accommodative has calmed investors down. The China Securities Regulatory Commission announced late on Monday that local governments will increase stock purchases while the central bank injected $8 billion into money markets on Tuesday and hinted at further monetary easing.

"Confidence in China's Rescue Squad was quick to rise this time around because market-boosting measures were already in place, compared to last month when it took a while for markets to believe in the government's defense," said Bernard Aw, IG's market strategist, during a phone interview.

Aw expects the official support program to last for another few months at least, thanks to Beijing's substantial war chest. Capital outflows have been on the rise with June foreign exchange reserves $299 billion lower than last year but that's still a drop in the water of Beijing's total $3.7 trillion reserves.

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He believes Beijing is willing to tolerate a modest correction but certainly not the extent of 8 percent crashes.

But for others, the government's program has no end in sight.

"The government entered the market when it was at high levels, around 30 times price-earnings ratio. There is no exit strategy for them; I think they've become long-term shareholders," Francis Cheung, head of China and Hong Kong strategy at CLSA, told CNBC.

Unless Beijing allows the market to correct to fundamentally supported levels or wait until earnings grow enough to support valuation, the government cannot stop, he warned. "Until then, we expect the market will trade between the government prescribed range of 3,400 to 4,500, the level that they intervened at the low end and the level brokers are allowed to sell stock at the high-end."

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