In, "The Complete Guide To China’s CNY 4 Trillion Margin Doomsday Machine," we presented a comprehensive look at the various backdoor channels the country has used to skirt official restrictions on leveraged stock trading. Here, courtesy of BofAML, is a breakdown of these channels and the bank’s best estimates of their size.
The dramatic sell-off that made international headlines last month and, along with the Greek drama, dominated financial market news, was precipitated by an unwind in these unofficial margin lending channels.
In a frantic attempt to restore the equity bubble that has for the better part of a year served as a distraction for China’s flagging economic growth and bursting property bubble, Beijing unleashed a plunge protection effort of epic proportions that included everything from threatening to arrest sellers to using China Securities Finance Corp. as a state-controlled margin lender.
In short, the PBoC, with the help of the country’s banks, helped CSF mushroom into a multi-trillion yuan Frankenstein and now that the mentality of the retail crowd (which in China had accounted for around 80% of daily turnover) has transformed from "buy the dip and get rich" to "sell the rip and break even,"any indication that CSF is set to exit the market is greeted with panic by market participants.
Here with a breakdown of just how much money has been funneled into Chinese equities by the so-called "national team" and on how, just like the Fed with QE, the PBoC will find that a swift exit is effectively impossible, is Goldman.
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China musings: How much has the government bought in the market?
The Chinese government's recent measures to support the domestic equity market through the so-called 'national team' institution are being frequently discussed by investors and in the media. In this commentary, we estimate the amount of money the 'national team' has spent to support the market, the remaining capital left available for use, the sectors that have likely benefitted from government support, the potential overhang on the equity market from government support measures, and our views on the equity market over coming months.
1. We estimate the 'national team' has spent around Rmb860-900bn to support the domestic equity market.
Our estimate is based on two dimensions: (1) top-down analysis based on our liquidity model; and (2) bottom-up analysis based on fund flow changes in key investment channels based on public information released by relevant media sources.
(1) Top-down approach: This method suggests the 'national team' bought approximately Rmb900bn in the market.
(2) Bottom-up approach: The 'national team' has bought around Rmb860bn if we sum up each channel.
Potential size, investment direction and the stock holders of the 'national team'.
(i) The potential capital available for market support is roughly Rmb2tn (including the money already spent). According to public information released by media sources including Sina and Caijing (July 24, 2015), 17 commercial banks have lent CSFC nearly Rmb1.3tn in total. CSFC's own debt issuance plus the PBOC's multi-channel liquidity injections imply a total of around Rmb2tn. It seems the government still has sufficient support capacity in the pipeline.
(ii) Government support has largely focused on large-cap blue chips and certain defensive sectors. Due to insufficient high-frequency data for fund flows across sectors, we used the sectors' performance fluctuation from end-June to July and concluded that supportive capital has mostly flowed into large-cap blue chips or certain defensive sectors, such as banks, insurance, F&B and healthcare. Admittedly, the 'national team' has also invested in some ChiNext stocks and SME stocks according to media reports and the listed companies' reports, although these investments appear to have taken up only a small proportion of the total government buying.
(iii) Which entities actually hold the stocks? Based on information from public media (Sina and Caijing), the 'national team' bought stock through three channels: 1) CSFC bought stocks directly (at least Rmb400bn); 2) subscribing to some major mutual funds (around Rmb200bn); and 3) CSFC provided credit lines for some brokers (around Rmb260bn).
3. Short-term market implications
(1) Potential index range-trading in the near term
a. Given the ample liquidity that the 'national team' still has, we expect market volatility to moderate and for A shares to find support in the mid-3000 level (around the previous dip, 3400 on the CSI300 Index). Recent trading patterns suggest that government support may be forceful around this level.
b. On the other hand, the media reports (Caijing, July 8, 2015) suggest that the regulatory authorities are dissuading institutional investors from reducing positions before the SHCOMP Index reaches 4500 (approximately 4600 for the CSI300 Index). Therefore, this level is now widely regarded as the upper range limit for near-term market performance. Once the index exceeds this level, we believe investors such as brokerage proprietary desks will be able to reduce positions.
(2) Market concerns over the exit by the 'national team' from its supporting measures
Many clients have expressed their concern over the 'national team's' potential exit from the market and view this as a supply overhang. In our view, the probability of a rash exit is low as the market has not yet stabilized and the government has no pressing need for the funds. Moreover, two notable examples of exits from government direct or indirect support for equity markets show long waiting periods: The Hong Kong Monetary Authority took four years to divest stock purchased during the Asian Financial Crisis in 1998 and the Federal Reserve in the US began to taper its quantitative easing policy in 2013, five years after initiating its first round of quantitative easing in late 2008.