Over the weekend, we along with Bank of America and probably most carbon-based traders wondered if any central bank or government official would step up on Monday and intervene in the markets, either verbally or directly. The answer emerged overnight, when China officially urged controlling investors in listed companies to boost their holdings and told some mutual funds to limit equity selling this week, Bloomberg reported, citing sources.
The directive from the Chinese Plunge Protection Team was sent out over the weekend, when the China Securities Regulatory Commission (CSRC) and other regulators "advised and encouraged" some major stockholders to purchase more shares in the mainland-listed firms they invest in. The regulators also called on some mutual funds to avoid being net sellers of equities as well.
The Shanghai Stock Exchange said on Friday that it has issued warnings and limited intraday trading to prevent large equity sales that affected the market’s stability. Meanwhile, the China Securities Investment Services Center -- a body serving smaller investors that’s managed by the CSRC -- said major shareholders can boost investor confidence by purchasing stocks, Shanghai Securities News reported on Monday.
Additionally, the CSRC, which is also known as the "National Team" once it begins manipulating markets, told Chinese brokerages to provide trading summaries from last week to the regulator as well as trading plans and previews for this week.
To some, the intervention was only a matter of time: Chinese shares on the mainland plunged the most in two years amid last week's global market turbulence, fueling speculation the government would step in to calm trading, as it did repeatedly during past selloffs in 2005 and 2006 as well as ahead of the 2007 Party Congress.
Initially triggered by the slump in U.S. shares, China’s retreat has been exacerbated by the looming Spring Festival holiday, which typically sees traders wanting to reduce holdings before the break. Beijing’s ongoing drive to reduce leverage in China has also added to downward pressure.
Hardly surprising, China has a track record of intervening to staunch losses in the mainland market, which is dominated by individual investors. The practice has spurred concern over moral hazard, as it creates expectations during times of volatility that officials will come to the rescue, however with the rest of the "developed world" just as guilty of spreading moral hazard, we doubt anyone is losing too much sleep over the unintended consequences.
While the informal directives were conveyed at the weekend, Bloomberg’s calculations show that more than 110 companies listed in Shanghai and Shenzhen issued statements related to major shareholders boosting their stakes between Feb. 9 and Feb. 12.
Supported by the government intervention, China's index of small-cap and tech shares, the ChiNext, rose 3.5% in Shenzhen, its biggest daily gain since July 27, after falling to a three-year low Friday
"The news about government support eased some worries," said Shen Zhengyang, Shanghai-based strategist with Northeast Securities Co. “People are hunting for bargains, especially smaller companies that fell too much in the recent rout." And also, because when the government tells you to buy stocks, you better follow orders.