By Samuel Shen and Nathaniel Taplin
SHANGHAI (Reuters) - The dramatic slide in China's stock markets this month threatens to breach the lows hit during last summer's crash, and will test Beijing's ability to calm skittish investors.
The benchmark Shanghai Composite Index, down around 14 percent so far this year, fell to as low as 2,867 points on Thursday, close to its 2,850 level in August, when Chinese policymakers scrambled to prevent a full-blown financial crisis, wheeling out a raft of support measures, including a so-called 'National Team' of investors who participated in a market rescue.
Some market players expect the National Team to do the same again to stop the index from breaching the low.
"SSEC's 2,850 low is a level worth defending for the National Team, and a level where investors should bet for a decent rebound," said Samuel Chien, a partner of Shanghai-based hedge fund manager BoomTrend Investment Management Co.
Chien said some stocks could see a rebound of as much as 50 percent, though whether the support would hold for the medium term was questionable and depended on the economic situation.
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The turbulent start to 2016, with the yuan currency and stock markets tumbling, has stoked concerns that Beijing is losing its grip on economic policy. Growth is at its slowest pace in 25 years as Beijing tries to change economic gears, switching from an industrial-based to more consumer-led economy.
A sharp slide in the yuan early this month fuelled those economic concerns and sparked investors to sell not only Chinese shares, but also stocks on markets globally. The currency has dropped 5.7 percent against the U.S. dollar since an unexpected devaluation in August.
Massive state-backed bank buying of the yuan in offshore markets to close a gap between the offshore yuan rate against the dollar and the onshore rate squeezed market liquidity, briefly pushing implied overnight interest rates to a record high of 94 percent.
"REAL MONEY, NOT RHETORIC"
On Thursday, stocks were down for most of the day, but rallied towards the close of trade, raising suspicions among dealers that the National Team had been in action.
The Shanghai Composite pushed just above 3,000 points to close the day up 2 percent, while the CSI300 index of the largest-listed companies in Shanghai and Shenzhen, ended 2.1 percent higher.
"You're seeing a bit of a rebound now, but I think we're likely to see new lows eventually, perhaps when earnings come out later in the year," said Alex Wong, director of asset management at Ample Finance Group in Hong Kong.
"Basically only domestic investors will be interested at this point. For us it's very clear, we would stay away because we don't want the interest rate or exchange rate risk."
Stock exchange filings show that more than 100 listed companies have said their major shareholders and top executives will not reduce their holdings in the near term, supporting government efforts to stem the sell-off. It was not immediately clear if the moves were orchestrated by the government.
However, such efforts may not be enough to keep the key indexes above their August lows, said Zhou Lin, analyst at Huatai Securities. The CSI300 fell to an intraday low on Thursday of around 3,072 points, just above its August low of 2,952.
"The yuan is depreciating, the U.S. is raising rates, and the economy is deteriorating. You need real money to support the market, not just rhetoric," Zhou said.
Ben LeBrun, market analyst at OptionsXpress in Sydney, said the Shanghai Composite index was now in bear market territory, usually a reference to a market's 20 percent slide from its last cyclical peak. The Shanghai Composite traded on Thursday more than 20 percent below its December highs.
"So that does not augur well for the future."
(Reporting by Sam Shen, Pete Sweeney, Nathaniel Taplin and Shanghai bureau; Additional reporting by Nichola Saminather; Writing by Will Waterman and Neil Fullick; Editing by Ian Geoghegan)