The volatility of the Chinese markets, over the last few weeks, appears to have stabilized following actions taken by the Chinese government including: cracking down on margin lending, banning some people from selling shares, ordering other people to buy shares, and providing cash to help people buy stocks with borrowed money. While it is unclear whether the interventions taken by the Chinese government are directly responsible for the market’s recovery, there is optimism that government policy is helping in some respect following the third straight day of market increases.

The Chinse markets experienced a difficult three week decline including stocks on China’s most prominent exchange falling 30% from a seven-year high, the ChiNext Index loosing 42% of its value over 21 days, share indexes plunging by close to a third of their original value, and uncertainty spreading about the future of the Chinese stocks.

However, even during the three week decline of the Chinese market, analysts continued to remind the public that despite the stock decreases, China continues to outpace the rest of the world in economic growth.

Government Action

Since the government took a more active role in the market, the benchmark Shanghai Composite index has gained 5.1% from the previous Friday’s close. Today, the Hang Send index rose to end the day at 25,244.01 points, the highest close since July 6, while the China Enterprises Index gained 1.2% to close at 12,003.83.

On Friday, Chinese Premier Li Keqiang said his country will make additional targeted changes to its policies to support the economy’s stabilization including “pursing active fiscal policy and prudent monetary policy” which he is “confident can sustain a reasonable pace of growth.” Whether additional government intervention will help ensure the markets stay on the right track or whether the opposite effect will ensue is still to be seen.

Unlike in the United States and many western countries where the government does not have much control over the stock market, in China the government has the ability to print an unlimited amount of cash and buy shares to reach a specified target price. By purchasing large amounts of stock, the Chinese government has the intention of boosting share prices and thereby encouraging individuals to invest as well. The Chinese government also has many other avenues available to significantly alter the market condition.

The People’s Bank of China, the country’s central bank with power over monetary policy and regulating financial institutions, took actions to change the reality in the markets by lowering interest rates and reducing the amount of reserves the banks hold. “This is the best time for them to cut interest rates and the reserve requirement ratios…If they had not acted, on Monday there would have been real panic in the stock market…It’s a signal that the government does not want to see a collapse in the stock market,” the Financial Times quoted Shen Jianguang from Mizuho Securities.

SPDR S&P China (ETF) (NYSEARCA:GXC), a long only equity fund managed by SPDR State Street Global Advisors that tracks the S&P China BMI NR USD index, is currently up 1.01% to $83.74.

The Impact on Youku Tudou Inc

Despite some positive gains in the Chinese market, many Chinese companies in both the Chinese and international markets are still struggling. Youku Tudou Inc (ADR) (NYSE:YOKU), China’s leading Internet television company, has underperformed the index by 32.8% in the last four weeks.

The consensus among analysts at present is to Hold the stock as the shares closed down 1.27 points or 6.04% at $19.76 when the market closed on Friday.

Amid falling stock prices for the company, Youku Tudou announced last Thursday of their plans to stream foreign TV series on their platform. As of July 16, the company announced that “paid subscribers will be given exclusive full season access and regular users will continue to have one new episode made available every subsequent weekday.”

The timing of this new streaming rollout is questionable given Youku Tudou’s drop in the markets. However, the company hopes this additional feature brings more viewers and eventually improves the company’s financial situation.

Youku Tudou shares are currently trading at $20.10, up $0.34 or 1.72%.

Alibaba to blame?

Many factors have been raised as potentially contributing to the Chinese market downfall. However, one company Hundsun Technologies Inc. controlled by Alibaba Group Holding Ltd (NYSE:BABA) has been singled out by local Chinese media as being a catalyst for the current situation.

Hundsun’s HOMS cloud-based system which was used by “grey market lenders,” or off-market financing firms that allow spectators to borrow up to 10 times their starting capital for up to 17% annual interest, has been blamed for contributing to the Chinese market fall.

In a filing to the Shanghai Stock Exchange today Hundsun stated: “It’s not objective or rational to say that HOMS was the major force of the stock market turmoil.” Furthermore, the China Securities Regulatory Commission said “off-market margin financing and sell-offs using the HOMS system were merely a small fraction of total transaction value.”

In their statement today, Hundsun said “only 30.1 billion yuan was forced-sold on its HOMS platform from June 15 to July 10,” accounting for 0.1% of the total transaction volume during the period. Yet, Alibaba and Hundsun will be forced to continue to respond to questions about their system and their possible role in affecting the Chinese markets.

Alibaba’s stock is currently trading at $81.99, up $1.69 or 2.10%.