The Central Government, securities regulator and financial institutions have launched a joint effort to support the country's plummeting stock market amid fears that a market crash could threaten the country's entire financial system.

Experts warned that further steep market declines without government intervention could lead to chain reactions across the financial markets, including the liquidation of fund and trust products as well as rising bad loans in the banking sector.

The State Council ordered the suspension of new share offerings over the weekend to release locked-up capital to the market. But reviews of new IPO applications will not stop, according to a spokesman for the China Securities Regulatory Commission. The number of new IPOs and the amount of funds to be raised will be drastically reduced, he added.

The People's Bank of China will offer liquidity support in various forms to China Securities Finance Corp, a State-owned company specializing in providing margin loan services to brokerages, to help stabilize thestock market, according to a statement issued by the regulator on Sunday.

Central Huijin Investment said it has invested in exchange-traded funds that track major stock indexes and will continue this operation.

Twenty-eight companies that had gained IPO approval from the regulator will postpone their fundraising due to the current market fluctuations, according to statements from the Shanghai and Shenzhen stock exchanges.

The country's top 21 securities brokerages have pledged to collectively invest 120 billion yuan ($19.3 billion) in exchange-traded funds that track large blue chip stocks.

The firms said they will not sell their holdings as long as the benchmark Shanghai Composite Index is below 4,500 points, while major shareholders said they will buy more shares. The index closed at 3,686.91 on Friday.

While it is uncertain whether a market-stabilization fund by securities firms can help to lift the market out of its nosedive, there is a growing consensus that powerful and effective government measures are necessary to restore investors' confidence in a wildly turbulent market.

The A-share market has been in a free-fall over the past three weeks, with the composite index posting its biggest three-week loss since the stock market opened in 1992.

The Shanghai gauge has slumped by nearly 30 percent, or 1,500 points, since mid-June, wiping out about $2.8 trillion in market value. The average loss of individual stock accounts has been around 420,000 yuan ($67,550), according to media estimates.

"If the government does not step in at this point, the panic sentiment will continue to spread and the stock plunge will deepen," said Lu Ting, chief economist at Huatai Securities.

"It will risk a spillover to the banking sector, as many funds that flew into the stock market are from trust products sold by the banks."

Lu said the government should create a national financial stabilization fund without an upper limit to invest in large-cap blue chips to boost the weak market. He also called for collaborative regulation among the securities, banking, insurance and monetary regulators to prevent similar crises from happening in the future.

Some analysts warned that the market slump could hold back the country's push for further financial reform and the liberalization of its capital markets.

"The irrational ups and downs show that the Chinese market still lacks an effective market mechanism," said Jay Luo, president of fund management company Dymon Asia Capital.

He said the country should not letthe stock market turmoil derail its efforts to introduce market-driven financial reforms, including switching from an approval-based to a registration-based IPO system.

The A-share market had witnessed a wild rally of 150 percent in the past year until June 12, propelled by highly leveraged margin trading that allows investors to borrow money to purchase stocks. Valuations of some listed startup companies reached as high as 150 times at the peak, similar to valuations seen in the Nasdaq market before the dot-com crash of 2000.

The regulator's crackdown on illegalleveraged trading in May triggered a massive deleveraging that led to a steep fall in stock prices and the forced clearing of stock accounts that failed to meet the margin call.

Xu Hongcai, an economist at the China Center for International Economic Exchanges, said Beijing's determination to deal with the situation will help to stabilize the market, but an immediate rebound is unlikely.

"The market will trade in a volatile band between 3,500 to 4,500 points. A buying opportunity is emerging in cheap, large-cap blue chips now, but the small stocks with excessive valuations will continue to decline," he said.

(China Daily July 6, 2015)