"Government intervention is necessary, but how to intervene is an important issue," Hong said.
Turmoil's potential consequences and solutions
A possible chain reaction in the country's financial system if the government does not intervene inthe stock market turmoil:
1. Market panic continues to spread, causing a further decline in stock prices.
2. Some mutual funds, private equity funds and trust products are liquidated due to heavy losses.
3. Bad loans at banks rise because they sold many wealth management products and leveraged trust products that invested in the equities market.
4. Foreign institutional investors sell their holdings in the A-share market, triggering possible cross-border capital flight and turbulence in the foreignexchange market.
Possible measures by the government to shore up the market:
1.The People's Bank of China can continue to ease monetary policy to inject liquidity in the market.
2.The Ministry of Finance can cut the stock stamp duty.
3. State-backed financial institutions, including pension funds and sovereign wealth funds, can increase holdings of blue chip stocks to stabilize market.
4. Insurance funds can be granted more quotas to invest in the equities market. About 1.65 trillion yuan ($266 million) is currently invested inthe stock market by insurance companies, according to data from the China Insurance Regulatory Commission.
5. The government can set a national financial stabilization fund or a "buffer" fund to invest in stocks.
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