(Yicai) Feb. 2 -- China’s major stock indexes slumped to four-year lows today, prompting economists to call for regulators to set up a stabilization fund, which is a tool used by governments to counter abnormal fluctuations in the stock markets.

A stabilization fund is urgently needed, said Li Xunlei, the chief economist at Zhongtai Securities. Long-term and stable incremental funds need to enter the market as soon as possible to restore investor confidence and reverse the weak market trend, he added.

The Shanghai Composite Index closed down 1.5 percent at 2,730.15 today, tumbling to an intraday low of 2,666.33, the lowest since April 2020. While the Shenzhen Component Index dived 2.2 percent to 8,055.77 and the ChiNext Index slumped 2.4 percent to 1,550.37.

China’s stock market has dropped sharply this year. The Shanghai Composite Index has plunged 8.2 percent, the Shenzhen Component Index 15.4 percent and Shenzhen’s ChiNext Index 18 percent.

The initial scale of the stabilization fund can be set around CNY1 trillion (USD140 billion), Li said. But this might need to increase to CNY5 trillion, based on the current stock market value of CNY73 trillion (USD10.2 trillion). Stabilization funds are usually between 3 percent and 6 percent of a bourse’s total market value.

The Ministry of Finance could issue special government bonds, which would be subscribed to by banks, insurance companies, social security funds and public fund companies, to inject liquidity into the stock markets, Li said.

Last month, China’s cabinet, the State Council, proposed pumping medium- and long-term funds into the stock markets to enhance the stability of the capital market. Later, Bloomberg reported that China would set up a stabilization fund of around CNY2 trillion (USD278.6 billion), but this has not yet been confirmed.

China’s stock markets experienced a sharp decline in 2015. At that time, China maintained market stability by buying shares on the secondary market through state-owned financial organizations Central Huijin Investment and China Securities Finance Corp.

China’s macroeconomic environment has changed a lot since 2015, so it is not enough to rely on additional funds but rather investor expectations need to be bolstered, Li said. This can be done by cutting interest rates to improve the fundamentals of companies and raise stock valuations.

Editors: Dou Shicong, Kim Taylor