China liquidates US$4 billion funds, leaving investors asking why

Two funds linked to the Chinese government sold all of their holdings of stocks and bonds in the third quarter without explaining why, leaving investors to guess about the implications for the country’s turbulent financial markets.

Withdrawals from the CM Fengqing Flexible Allocation Fund and E Fund Ruihui Flexible Fund caused their combined assets to shrink to 296 million yuan (US$43 million) at the end of the third quarter from 31.4 billion yuan in June, according to quarterly statements dated Wednesday. What remains are bank deposits and other unspecified assets. Both funds disclosed that 99 per cent of their units were redeemed during the period, without providing details on who pulled the money and why.

Scrutiny of state-linked funds has increased in recent weeks as investors attempt to gauge how China’s government will react to the country’s deepest equity sell off since 2015. While the so-called National Team of government funds ploughed billions into stocks to prop up the market three years ago, authorities have taken a more measured approach this year. They’ve focused primarily on helping companies gain access to financing, stopping short of a full-blown market rescue.

Given the funds’ sparse disclosures, it’s unclear whether the redemptions represent a net reduction of government support for Chinese markets. Some or all of that the money could have been moved to other investment vehicles, according to Liu Wu, an analyst at China Development Bank Securities Co.

“The outflow in the two state funds might signal that the National Team is adjusting its investment strategy,” Liu said. “It’s unlikely to mean the National Team will exit from the stock market. One possibility is that the National Team might intend to reduce their exposure in mutual funds, so as to better allocate their ammo.”