China's stockmarket has slid 26 per cent this year, making it one of the world's worst performing markets and raising questions whether authorities may take action to prevent the market from tumbling much more sharply.



A crackdown on the country's red-hot real estate sector combined with a money market squeeze due to a flood of share issuances - including Agricultural Bank of China's record $26 billion offer - have driven the Shanghai Composite Index to 15-month lows.



The government, already facing rising worker unrest, high property prices and inflation concerns, will likely want to avoid drawing the ire of Chinese investors watching their savings dwindle in the country's volatile market. But so far the market drop is not severe enough to prompt action.



Below are some scenarios on how officials may intervene against a further market drop. Chinese officials have historically taken measures in the stockmarket, both to limit big surges and slides.

No intervention - very likely



Unless the index falls below 2200 points from the 2,413 level at midday on Thursday, Chinese authorities are unlikely to do anything to stop the market from falling, analysts said.



Officials may also be happy to have taken the steam out of the stockmarket in the past year by unleashing IPOs and cracking down on the money going into the stockmarket, especially from bank lending. In the first half of 2009, the Shanghai market soared more than 60 per cent.



After the property market restrictions prompted household investors - the biggest force in the market - to shed shares, tight money market conditions have only made things worse.



The benchmark money market rates have soared as banks have had trouble raising funds due to the squeeze, limiting the ability of investors to borrow and forcing them to dump shares to raise cash.



But analysts are confident for now that the market can absorb the incoming rights issues without sliding to levels that would make officials nervous.



Now that AgBank's blockbuster issue is just over, some of the money that failed to win in the subscription process is expected to go back into stocks. AgBank has also given confidence to the other major state-owned banks about raising funds now.



In the past few days Bank of China and Industrial and Commercial Bank of China are both reported to be preparing rights issues, but the news has made few waves in the shares - suggesting investors have expected these funding needs.



Light intervention - likely



A drop in the Shanghai Composite below the 15-month low of 2319 hit this week and towards 2200 points may prompt authorities to consider taking modest steps to boost the market.



Possible steps include a slowing of IPO approvals to ease liquidity pressures and potentially spreading them out so the market can more easily absorb new share listings.



Chinese firms siphoned off around 450 billion yuan ($75.6 billion) from the stockmarket via initial public offerings, rights issues and new share issues in the first half of the year.



About 60 to 70 firms are now on a waiting list to issue shares, with the total amount of money to be drained from the market by corporate fundraising via stocks expected to reach 800 billion yuan this year, analysts estimate.



"If the market starts to get out of control the authorities will start to examine the situation," said an equity analyst at a Chinese brokerage in Shanghai.



Another option is the People's Bank of China injecting more liquidity into the money markets via its open market operations.



The Chinese central bank has injected a hefty nearly 900 billion yuan into money markets over the past seven weeks to help ease the cash crunch, caused mainly by the AgBank IPO and indirectly hitting shares.



Raising the stamp duty for stock sellers is another method, but analysts say this would be largely symbolic and not result in swift gains for stocks.



Beijing exempts share purchases from the stamp tax but levies a duty of 0.1 per cent on stock sale transactions.



Heavy intervention - very unlikely



Analysts say authorities are unlikely to take more severe measures like suspending IPOs or directly buying up stakes in large state-owned banks and companies. They may instead use state funds, such as Central Huijin, to purchase shares indirectly.



A suspension of IPOs would also be detrimental to strong fund demand from major Chinese companies and official efforts to push companies to rely more on markets for fundraising.



At the same time, analysts say the government does not wish to project the impression that it is directly intervening in market activities.



Beijing is pushing on many different fronts to modernise the country's markets and has even backed away from direct day-to-day intervention on the yuan after ditching the currency's peg to the US dollar last month.

Reuters