Portfolio | Less than half of China’s 2 trillion yuan market support war chest used; only some sectors benefit

The Chinese government has now spent between 860 billion and 900 billion yuan to support domestic stocks, a new report says, but where has that money gone and what does it mean for investors.

“Government support has likely focused on blue chips and defensive sectors…we prefer undervalued stocks in stable growth sectors,” wrote analysts at Goldman Sachs in a recent market appraisal that predicts Shanghai Composite index shares will be “bound” by a trading range between 3,400 and 4,500 points.

Banking, agriculture, hotel and tourism, and insurance have received the lion’s share of a hastily conceived bailout programme designed to put a floor under a fast collapsing market that threatened to wipe out dozens of companies and upend ongoing market reforms.

On average, firms in defensive sectors fell less that the wider market, which is now down around 28 per cent since hitting a seven year high on June 12. Banking stocks, for example, are 2 per cent lower since late June, wrote Goldman analysts, while steel firms are off by 25 per cent.

Goldman bases its estimates on market fund flows and media reports, and says the government has used less than half its 2 trillion yuan war chest. The state run China Securities Finance Corp, set up to provide margin finance and market liquidity, bought 400 billion yuan in stocks directly, brokerage houses chipped in another 200 billion yuan via their own exchange traded funds, and the CSFC handed a further 260 billion yuan in credit lines to brokerages, Goldman calculated.

This number is conservative by some estimates. Peking University professor Christopher Balding last month told the South China Morning Post he thinks total intervention equals 9.8 trillion yuan, though his number includes central bank short term loans and money to back a provincial government bond buying programme.