How the invisible hand of the state works in Chinese stocks ‘National team’ of government-backed companies stands ready to support asset prices Chinese brokers are in agreement that Beijing has yet to truly unleash the buying power of the new 'national team’
As the biggest sell-off in more than four years hit Chinese equities on Monday, speculation grew that China’s so-called “national team” of state-backed buyers would enter the market and cushion the blow from the coronavirus-driven drop. But traders at brokerages and asset managers in China said the team mostly kept its powder dry on Monday. It was not until after market close that state media confirmed the cavalry was prepped and ready — specifically, a group of Chinese insurers with Rmb100bn ($14.3bn) ready to plough into the stock market if necessary. That helped bolster investor sentiment, with the benchmark CSI 300 index of Shanghai and Shenzhen-listed stocks climbing 2.6 per cent on Tuesday after dropping about 8 per cent during the previous session. But longtime observers chalked the gains up mostly due to faith in the buying power of the national team, rather than any evidence a bailout was already under way. “One of the key things about state support is that everybody believes it’s going to happen, so it’s part placebo, partly real,” said Fraser Howie, an independent analyst and co-author of the book Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise. Traders at the asset management arms of Huatai Securities and Galaxy Securities said they had not yet been ordered to buy stocks, although one noted that “you rarely lose money by purchasing stocks when others are panicking”. Huatai is 24 per cent owned by Jiangsu provincial government, while Galaxy is 51 per cent owned by Central Huijin, a state investment company, and the Ministry of Finance. But traders at three brokerages confirmed they had received window guidance from the China Securities Regulatory Commission telling them to limit stock sales and refrain from betting against the market through short selling. Such guidance is now a hallmark when volatility spikes in China’s markets, even if the national team is not always made up of the same players. When a stock market bubble popped in 2015 it was the 20 biggest onshore securities companies — many of them state-owned — that were tapped to buy up stocks in an attempt to halt price falls. In August that year Goldman Sachs estimated that a coalition of state financial institutions had spent $144bn in a couple of months, or just under half the war chest the team had at its disposal. Eventually they handed over those stock holdings of about Rmb2.95tn to China Securities Finance Corp, a state-owned margin lender, and Central Huijin, which acts as a holding company for shares in state-owned financial institutions. Today the combined holdings of these two team members are worth roughly the same, according to estimates from data provider Wind. Subsequent national teams have never matched the level of buying seen in 2015 and 2016, but major brokerages were dragooned into forming bailout funds last year in response to a string of bond defaults onshore. By the end of 2019, domestic brokerages had set up 198 relief funds worth Rmb125bn in total, of which Rmb61bn had been invested in 366 projects and troubled companies nationwide, according to the Asset Management Association of China. Recommended Market Forces A dicey period for risk sentiment Premium For this year’s team, brokers have been joined by major Chinese insurers. One trader with Shenwan Hongyuan Securities said regulators saw insurers as well-suited to the task of stabilising markets because “they are robust, have capital to invest for the long term and [stock purchases] will not have a direct impact in the short term on the people they insure”. The trader added: “If you take a really long term view, after that 8 per cent drop [on Monday] it makes sense to enter the market.” But he conceded the Rmb100bn stock splurge state media had promised from insurers was “obviously” meant to support prices. He and others working at Chinese brokers agreed that Beijing had yet to truly unleash the new team’s buying power, but would probably do so if the outbreak worsened or the impact on business from containment measures dragged on longer than expected. The trader at Huatai said investors had already priced in the possibility of coronavirus cases in China not peaking for another month. But markets could begin to panic if infections continued to reach record levels in April. “That’s when a government bailout is needed,” he said.