The People's Bank of China (PBoC) decided on Wednesday to cut the one-year benchmark bank lending rate by 25 basis points to 4.6%, cut the one-year benchmark deposit rates by the same amount, and reduced the reserve requirement ratio (RRR) by 50 basis points to 18% for most big banks. The move came after the Shanghai Composite index plunged another 7.63% on Tuesday to close at 2,965.15, after Monday’s major meltdown of 8.46%. 

Actually, this could have been done over the weekend to avoid Monday's global financial mayhem and to calm China's neophyte individual investors from panic selling. Instead, China's regulators announced late Sunday that it would allow pension funds managed by local governments to invest in the stock market for the first time. Beijing is hoping that hundreds of billions of yuan from pension funds will be channeled into the struggling China equity market. 

The Shanghai Stock Exchange did not seem to pay any attention to the pension fund announcement and tumbled right at the opening on Monday as China’s stock markets took a cue from the U.S. stock market’s 3% plus sell-off on Friday. China's individual investors misinterpreted the market sell-off and instead speculated that the China regulators were letting markets dive further to provide a lower entry point for domestic pension funds. After individual investors saw no evidence of any attempt by state-connected funds to buy into the market, they started panic selling. 

One of the problems is that there are hardly any institutional investors and financial advisers in China, so investing is still haphazard, more or less.

Beijing has been trying to put a floor on China’s stock markets without success. The government’s measures include restrictions in short-selling, and liquidity injections by the PBoC to the government-owned margin lender China Securities Finance Corp (CSFC) so that the CSFC can give credit lines to 21 brokerage houses to purchase Chinese equities to stop the markets from crashing further. The IMF urged China to exit measures to prop up stocks but no one seems to be listening. 

Technically, the Shanghai Composite index broke down the bearish ascending wedge at the end of June and the projected target was 3,137 or the base of the wedge. The index has now closed below that level and is supported at the bottom trendline of the descending triangle chart pattern. If the last minute move by the PBoC to cut the interest rates and the RRR fail to stem China’s equity market rout, the Shanghai Composite index will break down through the descending triangle. The next support will be at around the 2,600 level.