By Lu Jianxin and Pete Sweeney
SHANGHAI (Reuters) - A 20 percent fall in Chinese stocks over the past two weeks, mainly blamed on a flood of initial public offerings, highlights the risks that regulators face as they try to use the stock market to support the slowing economy.
The central bank cut interest rates and bank reserve requirements on Saturday, which analysts say is mainly aimed at restoring investor confidence in the market after key indexes fall over 7 percent on Friday, the biggest one-day fall since the global financial crisis.
"The government appears eager to maintain a bull market to expand the capital market and reduce reliance on bank lending," analysts at Standard Chartered said in a note to clients on Saturday.
The stock market, which has seen indexes gain as much as 150 percent since November, has been one of China's few bright spots as economic growth has flagged and property prices have slid, and regulators have tried to take advantage of it to support the wider economy.
By allowing companies to raise fresh funds with high valuations, either via IPOs or secondary issuances, China can attack two goals at once, supporting growth and draining excess speculative liquidity flowing into the market through a surge in margin financing.
"Regulators have tried to guide the market, encouraging investment at the levels they believe are low and pouring cold water at the high levels," said a domestic fund manager, who spoke on condition of anonymity because he is not allowed to speak to media.
However, the balancing act is tricky because the latest slew of IPOs temporarily locked up over $1 trillion in funds, one of the causes of the market freefall.
In China, investors apply to buy into IPOs via a lottery system, and while the lottery is run, the funds they apply with are put in escrow. That can suck huge amounts of money out of the monetary system for short periods of time.
In the week starting June 14, the China Securities Regulatory Commission (CSRC) allowed 24 IPOs to raise around $6.5 billion from the markets, which temporarily locked up $1.13 trillion during the escrow period. Figures for last week were not immediately available, but brokerage Guotai Junan Securities Co listed in Shanghai on Friday after raising $4.9 billion in the country's biggest IPO since 2010.
At the close on Friday, the key CSI300 index was down 7.9 percent, its biggest one-day percentage fall since June 2008, while the Shanghai Composite Index (.SSEC) tumbled 7.4 percent. Overall, Chinese stocks are down 20 percent from their peak earlier in June, well into technical correction territory.