On Monday and Tuesday, China’s plunge protection team attempted to step out of the market. The result: a 15% decline on the SHCOMP, the shockwaves from which reverberated in equity markets across the globe.
After Wednesday’s ad hoc policy rate cuts failed to shore up sentiment, the PBoC was forced to come face to face with the harsh reality that massive capital markets intervention is very difficult to unwind once implemented and indeed, China isn’t alone in grappling with the rather undesirable consequences of pulling back central bank support for markets.
Rather than watch as the SHCOMP crashed through key level after key level, China looks to have stepped back into the market on Thursday and again on Friday in a desperate attempt to restore order ahead of a military parade next month which Beijing apparently sees as an opportunity for Xi Jinping to project the country's growing power to the rest of the world.
Here is a quick summary of the last week seen through the perspective of Chinese stocks.
- Aug 20: -3.4%
- Aug 21: -4.3%
- Aug 24: -8.5%
- Aug 25: -7.6%
- Aug 26: -1.3%
- Aug 27: 5.3%
- Aug 28: 4.8%
But as is the case with the PBoC’s open FX interventions, some doubt how long China will be willing to spend money to prop up stocks and at least one analyst thinks that Chinese equities are in for further dramatic declines in the absence of the CSF bid. Here’s more from Bloomberg [9]:
The rebound in China’s stocks will be short-lived because state intervention is too costly to continue and valuations aren’t justified given the slowing economy, says Bank of America Corp.
“As soon as people sense the government is withdrawing from direct intervention, there will be lots of investors starting to dump stocks again,” said David Cui, China equity strategist at Bank of America in Singapore. The Shanghai Composite Index needs to fall another 35 percent before shares become attractive, he said.
The Shanghai gauge rallied for a second day on Friday amid speculation authorities were supporting equities before a World War II victory parade next week that will showcase China’s military might. The government resumed intervention in stocks on Thursday to halt the biggest selloff since 1996, according to people familiar with the matter.
China Securities Finance Corp., the state agency tasked with supporting share prices, will probably end direct market purchases within the next month or two, Cui said.
Be that as it may, it doesn’t look like CSF intends to go down without a fight - it’s either that, or the plunge protection team is looking to go out in a blaze of market-manipulating glory, because overnight, Caixin reported that the vehicle looks to have applied for around CNY1.4 trillion in new loans from banks. On the bright side, we suppose that means China will be able to report blockbuster credit growth in August or else in September, just as they did in July [10], thanks to the fact that loans to the plunge protection team are counted as though they represented real, organic demand for credit.
If CSF does indeed exit the market after one final trillion-yuan buying spree, it looks like next in line to prop up Chinese equities will be China’s pension fund assets, as much as 30% of are set to be funneled into stocks. Here’s The People’s Daily will the Party line [11]:
Some 2 trillion yuan pension fund could be invested in domestic stock market, an official estimates in a press conference in Bejing Friday.
Pension fund is allowed to be invested in new products, including domestic stock markets,but restricts the maximum proportion of investments in stocks and equities to 30 percent of total net assets.
Deputy Finance Minister Yu Weiping said that China will start investing of the pension fund after collection. Currently China is drafting regulations on pension collection and transfer.
China is capable to ensure long-term stable returns and will control the risk associated with the pension fund investment, says You Jun, Deputy Minister of Human Resources and Social Security.
You Jun estimates some 2 trillion yuan pension fund could be invested in domestic stock market. The role of the investment is not to support the stock market, or to rescure [sic] it.
Yes, the point is not "to support the market" and definitely not to "rescure it", it’s just China taking a hard look at its pension fund investments and making smart decisions about how to allocate capital - or something.
But whatever the case - and the fact that stock market interventions are correlated with public spectacles like military parades is proof positive of this - Beijing is clearly aware that allowing the market to collapse completely would deal a death blow to the public's already shaken belief in the omnipotence of the Politburo and that is a completely unacceptable outcome. At the end of the day, the masses must be appeased and, more importantly, they must be pacified and if spending a few trillion yuan is what it takes to acheive that, then so be it, and after the two-day rally everything is fine... for now at least...
