China’s efforts to arrest destabilising declines in domestic stocks in recent years have become so well recognised that market players coined the term “the national team” to describe buying by state-owned funds. In the latest bout of turmoil, there’s been a twist.
It’s local authorities who have been most active to cushion what’s been a near-30% plunge in the Shanghai Composite Index from its January high. Officials in the southern cities of Shenzhen and Shunde as well as Beijing’s Haidian district have moved to help listed firms from their areas, according to local authorities and media reports.
Rather than the across-the-board purchases seen in efforts led by the central government in the wake of a $5tn sell-off in 2015, this time around aid appears to be channelled to specific companies in need of liquidity support. Many are linked to share pledging – the practice of taking out loans using stocks as collateral. Stock slides spur brokerages to dump the collateral, in turn worsening the market rout and making it all the tougher for the companies involved to find financing.
Tech-hub Shenzhen, in China’s south, allocated tens of billions of yuan to reduce risks from share pledging and help liquidity of publicly listed companies registered in the city, according to Shanghai Securities News.
Shenzhen H&T Intelligent Control Co and Hybio Pharmaceutical Co confirmed that they are among the beneficiaries of the support.
“It’s likely that this is guidance handed down by the central government,” said Yin Ming, vice president of investment firm Baptized Capital. While the intervention of national-level state-run funds spurs “broad-based gains in both good and bad firms and inflates valuation bubbles, this is more targeted,” he said.
Yin said the approach “kills three birds with one stone.” It avoids the more wasteful nation-wide approach pursued in 2015, when efforts included asking brokerages to contribute 100bn yuan ($14.5bn) to a market-rescue fund. It also supports employment amid China’s economic slowdown, and may help local stocks. Equities traders may not be warming up to the idea just yet. It’s not offering much solace for the broader market, at least.
The Shanghai Composite hit a four-year low on Tuesday, cementing its position as the worst global benchmark. China’s market capitalisation is down some $3tn, knocking it down one notch to number three in global rankings.
Shenzhen’s Hybio closed up 0.7% yesterday, while Shenzhen H&T dropped 3.5%. Some local stocks fared better after the Beijing branch of the China Securities Regulatory Commission set up a 10bn yuan fund to support private-sector, publicly listed technology firms in the city’s Haidian district. Beijing Wanji Technology Co and China National Software & Service Co both jumped by the 10% daily limit.
Still, traders remain jumpy. Lighting maker Sanan Optoelectronics Co suddenly plunged by the maximum allowed in morning trading yesterday. About 30% of the company’s shares have been pledged as collateral for loans, according to China Securities Depository and Clearing Corp data. Department store operator Zhongbai Holdings Group Co touched a five-year low after saying a brokerage sold some of its pledged shares.
The bottom line: it remains uncertain whether the local-led approach will reverse the downtrend in China’s domestic market, says Bifan Shen, chief strategist at Shenzhen Spruces Capital Management Co.
Investors look at computer screens showing stock information at a brokerage house in Shanghai. China’s efforts to arrest destabilising declines in domestic stocks in recent years have become so well recognised that market players coined the term u201cthe national teamu201d to describe buying by state-owned funds.
