China stock market: state buying of shares has become more frequent and will support rebound towards year-end, Goldman Sachs report says

‘The ‘National Team’ buying helps reinforce our view that Chinese equities could stage a recovery rally towards the year-end,’ Goldman said in a report
The top five exchange-traded funds favoured by the National Team surged by US$12.3 billion in net subscriptions in August, it said

China stock market

Zhang Shidongin Shanghai

Published: 12:30pm, 16 Oct 2023

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The government has become more active in buying Chinese stocks since August as it attempts to breathe life back into the flagging market, according to Goldman Sachs.

The US investment bank predicts this will help engineer a rebound in equities for the rest of the year.

“The ‘National Team’ buying helps reinforce our view that Chinese equities could stage a recovery rally towards the year-end as growth stabilises and policy easing momentum improves,” Goldman said in a report, using a term used by local investors to refer to state buyers.

It reached its conclusion based on indicators such as the trading patterns of key holdings by state-linked entities, inflows into selected index-based exchange-traded funds (ETFs) and insider buying of shares in state-owned enterprises (SOEs), analysts including Si Fu and Kinger Lau explained in the report.

The top five ETFs favoured by the National Team surged by 90 billion yuan (US$12.3 billion) in net subscriptions in August, it said.

16:50

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The possibility of more direct state interventions in China’s US$9.5 trillion stock market has grown after Central Huijin Investment, a unit of the nation’s sovereign wealth fund, increased its stake in the “big four” state-owned banks for the first time in eight years last week. The move sparked speculation that similar direct efforts to prop up the market might follow.

Li Bei, a top-performing Chinese hedge fund manager, called on the government to set up a stabilisation fund to shore up stocks

Chinese stocks have remained sluggish even after a barrage of supportive measures to bolster economic growth and prop up equities, including the loosening of restrictions on property purchases and a cut in the stamp duty payable on stock market transactions. Investors, particularly global fund managers, are doubtful about whether these piecemeal measures can sustain a recovery in growth.

A sell-off by overseas investors continued for a second straight month in September. The CSI 300 Index of yuan-traded stocks has dropped about 6 per cent this year.

The National Team is estimated to have amassed holdings of onshore stocks that are equivalent to 3.5 per cent of the total market capitalisation, or about 2 trillion yuan, according to Goldman.

Direct state intervention in stocks may not be an effective tool to stem declines, if history is any guide. In the 2015 meltdown that erased US$5 trillion of market value, the CSI 300 Index tumbled more than 40 per cent in the space of two months even after Beijing bought stocks through state-controlled China Securities Finance, Central Huijin and leading brokerage firms.

Strategically, China’s onshore stocks remain the preferred choice for equity allocation over their offshore counterparts, because of their lower sensitivity to geopolitical tensions and overseas liquidity flows, and better sector alignment with policy tailwinds, according to Goldman.

Chinese equities have reacted positively on average the last six times Central Huijin has raised its stakes in the big four banks since 2008, with the CSI 300 Index rising a median of 4 per cent in the following three months, it said.

“The most effective tool to stabilise asset prices, revive investor confidence and to cut out the [last remaining] systemic risk embedded in asset valuations has been outright equity purchases by the government (or sponsored entities), often in substantial scale and with government/central banks acting as a last resort in terms of liquidity and funding provision,” Goldman said in the report.

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