Chinese Shares Surge As Beijing "Plunge Protection Team" Boosts Stock Holdings

Having repeatedly met with resistance around 3,300, over the past week China's Shanghai Composite finally broke out, and overnight rose another 0.9% to 3,362.65, its highest level since December 2015, following a sharp move higher in both the Chinext small-caps index, but mostly due to a spike in Chinese broker stocks.

There have been various explanations for this move, with Bloomberg focusing on recent strong earnings, mostly out of China's big caps, where recent consolidation has pushed profits and ROE higher.

Companies on MSCI's China and Hong Kong indexes have beaten earnings estimates by the most among major emerging markets this year, underpinning rallies of 40 percent and 25 percent respectively... Profit at China Shenhua Energy Co. more than doubled in the first half as coal prices soared. Shenhua's Hong Kong-traded shares have provided a 58 percent return to investors so far in 2017, aided by a bumper special dividend declared in March. There are plenty of other examples. In the liquor industry, Wuliangye Yiban Co. and Kweichow Moutai Co. now control more than 60 percent of the high-end market, giving them oligopoly power over retail prices. Their shares have soared 61 percent and 48 percent.

Still, Bloomberg observes that while Chinese megacaps have seen a decent boost to the bottom line the same is not true for most of the market:

"the picture is less pretty when we look at the small fry. Among the 800-odd Chinese companies listed in Hong Kong, there is a drastic divergence in earnings and year-to-date returns, data compiled by Gadfly show. Large-cap companies -- defined as those with a market cap of $10 billion or more -- have so far reported median growth of 18 percent in sales and 23 percent in earnings for the first half. By comparison, the median small-cap company increased sales by 12 percent and earnings by only 9.5 percent. That might appear a counter-intuitive result to some, given that it should be easier to grow faster from a small base."

And while we see the merits in attributing the recent move to fundamentals, the true reason for the latest surge higher had little do with corporate profits and everything to do with China's "Plunge Protection Team", also known is the "National Team." As various press and social media outlets reported overnight, the surge in Chinese stocks started with CITIC Securities, which surged a whopping 6.2% on the highest volume in a year...


... not due to some new results, but because China's "National Team", in this case state-backed investor China Securities Finance Corp., announced it had boosted its stake in the firm, and across the entire sector.

Similarly, Orient Securities surged by the 10% daily limit in Shanghai after China Securities Finance’s stake rose to 4.99% in 2Q, according to Orient Securities filing to the Shanghai stock exchange Monday, up from 4.06% in previous quarter. In Hong Kong, Orient’s shares jumped by a record 6.4%.

Additionally, China Merchants Securities rose as much as 7.6% in Shanghai, their biggest gain in a year, and 4.9% in H.K. The reason was the same: a Friday filing showed China Securities Finance stake in the company nearly doubled to 4.64% in 2Q; from 2.67% in 1Q. Others followed: Huatai Securities surges as much as 9.7% in Shanghai to the highest since December 2015, climbing 4.9% in H.K. to highest this year; China Galaxy Securities advances 9.3% to highest in five months in Shanghai, up 3.6% in H.K.

Ultimately, brokers - a leading sector for overall market sentiment - accounted for 6 of top 10 gainers on CSI 300 Index, which is up 1.4% at highest since December 2015, while the gauge of A-share brokers jumped 5.4% to highest intraday since last December.

Whether this aggressive purchasing of domestic stocks by the Chinese government's "National Team", which has traditionally stepped in during times of market stress but is now apparently engaged in boosting sentiment even in less stressful periods, not to mention stock price, is due to the upcoming National People's Congress, ahead of which Beijing wants a stable and rising capital market (and, obviously, no turmoil) is unclear, however the fact that just like across developed world nations this was achieved through state intervention in "price discovery" is the latest red flag that capital markets remain unable to rise sustainably on their own merits and that only state intervention - now that capital markets are a policy tool - is capable of sending stocks to new highs.

This is also why virtually nobody believes central banks, who repeatedly assure market participants that normalization will be a "nothinburger."

Instead, as Matt King noted over the weekend, "at an investor breakfast in Stockholm this week, when asked how many subscribed to what we call the “central bankers’ and economists’ view” that fundamentals were now strong enough to permit a very modest dialing back of central bank QE, not a single one of the 25 present raised their hand." He then adds:

"All subscribed to our view that it was instead likely to prove surprisingly disruptive for markets. How on earth did we come to have such a one-sided market? And what happens to trading dynamics when markets are this one-sided?"

In light of the above data, the answer should be self-evident.