Playing SAFE: Why Chinese forex regulator buying up stocks is raising eyebrows
China’s foreign exchange regulator, the State Administration of Foreign Exchange (SAFE), has
become the latest member of the ‘national team’ tasked with propping up the stock market, raising questions about both its suitability for the job as well as the efficacy of a programme that has failed to animate the market despite splashing out billions of yuan.
According to published company filings by Thursday, Buttonwood, or Wutongshu Investment Platform, a wholly owned company under SAFE, along with its two subsidiaries bought 27 billion yuan (HK$32.37 billion) of shares in 11 banks and financial companies. That would mean that
for the first time, the manager of China’s US$3.2 trillion foreign exchange reserves is playing the stock market.
“We understand that at the end of the day, all these national team members report to the top decision makers, but the popping up of new ones just makes the situation murky, triggering suspicions about vested interests backing the market-saving campaign,” said Kay Van Peterson, global macro strategist at Saxo Bank in Singapore.
“We have been watching Bank of Japan buying ETF (exchange-traded fund) products since 2012 and the European Central Bank buying corporate debts – all central bank interventions. In China, it seems more complicated,” he said, noting the multiplicity of players.
Previously, state-owned margin lender China Securities Finance Corp (CSFC) and Central Huijin Investment, a unit of sovereign wealth fund China Investment Corp, were doing most of the heavy lifting in shoring up stocks when the market plunged.
CSFC, in particular, was hand-picked by Beijing to steer the market rescue since last July, after the Shanghai Composite Index plummeted more than 30 per cent in two weeks from a seven-year high reached in mid June.
Goldman Sachs estimates the CSFC-led rescue campaign saw 1.5 trillion yuan pumped into the market buying up shares in the second half of last year. But though it helped pull the market back from the brink, the national team’s rescue operation has been mired in criticism over the conduct of its participants and the overall impact.
In August, several top executives of Citic Securities were taken away by police for investigation, reportedly for taking advantage of inside information on the rescue operation. In September, Zhang Yujun, former assistant chairman of the China Securities Regulatory Commission (CSRC), the country’s top securities watchdog, was also taken away for investigation. His boss, CSRC vice-chairman Yao Gang, followed a month later.
Guo Shiliang, an independent finance commentator based in Guangzhou, said the authorities have “made statements that they may transfer their stock holdings to professional financial institutions for better management”, adding the national team is likely to see small losses on their books given the benchmark index is still way below the level at which the shares were bought.
Questions have been raised on whether Buttonwood has the professional wherewithal for stock picking, said Chen Li, managing director of equity research at Credit Suisse.
“It seems Buttonwood purchased the bank shares themselves rather than taking them over from other national team members. But this is hardly the right time to buy bank shares,” he said.
The main question being asked in the financial world is, if China really needs so many national team members to fix its stock market.
“I don’t think a ‘national team’ can bolster any market… because in essence, it is artificial support… it’s not real private interest or support, which is what is needed for the long-term prosperity of any market,” said Peterson of Saxo Bank.
The annual reports of the companies showed Buttonwood held 1.42 billion shares, or 0.4 per cent of Industrial Bank of China (ICBC) by the end of 2015 and 1.06 billion shares, 0.36 per cent, of Bank of China. It also held 3.15 per cent of Shanghai Pudong Development Bank, 1.07 per cent of Bank of Communications and 0.21 per cent of Everbright Securities.
Buttonwood was not among the top 10 shareholders of any of these companies in the third quarter of 2015, meaning it bought up all these shares within a very short time in the last three months of 2015.
This February, Beijing appointed Liu Shiyu, former chairman of Agricultural Bank of China, as the new chairman of the CSRC. Liu has vowed not to withdraw the national team from the market.
The CSFC was allowed to borrow trillions of yuan from entities ranging from the central bank to commercial lenders and brokerage firms, for the market rescue operation. Huijin, pension fund managers, and brokerage companies were also ordered to chip in.
Chinese media reported the national team members were among the top 10 shareholders of 1,358 listed companies by the end of the third quarter, holding stakes worth 1.35 trillion yuan. Yet, after the initial boost following its shopping spree in July and August, the benchmark Shanghai index is still languishing below the 3,600-point level at which the CSFC intervened in July.