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How the Chinese Government "Supports" the Chinese Stock Market

Editor, TRANSFIN.
Jul 9, 2020 8:21 AM 5 min read
Editorial

Something strange is happening in the Chinese stock market.

The CSI 300 Index - a gauge of the country’s biggest stocks - has added 14% in just five days; there was a 5% gain on Monday alone. The momentum on the index has been the strongest since 2014 as shares of brokerages, banks, miners, aviation companies and developers have surged. 

Take a look at the CSI 300’s performance in recent days. The climb has been steep, indeed!

How the Chinese Government

All in all, investors seem to be very eager suddenly to infuse money into Chinese markets.

But why?

After all, we’re still in the middle of a pandemic, the global economic outlook is bleak, and China is still facing the possibility of a second wave of infections. Furthermore, China’s trade ties with the US have continued to slump and recent Q1 GDP numbers showed a 6.8% contraction.

To Be Fair: Stock market surges may not always indicate an economy on the right track. US stock markets have been rallying lately despite the worsening coronavirus outbreak there, even as the US became the worst-hit country in the ongoing pandemic with its peak far away.

To Be Fair #2: China has done a good job keeping infection levels low. It is the only major economy slated to grow this year (as per IMF predictions) and is generally expected to stage a strong rebound in the next fiscal. Official data last week showed China’s economic recovery picked up steam in June. Moreover, low interest rates and losses on high-yield wealth management products have also helped propel a flight to stocks.

So maybe there’s nothing out of the blue about this recent stock market boom in China?

Actually, there is.

In recent days, Chinese state media has gone on a publicity spree encouraging investors to cash in on the “post-coronavirus economic boom”.

“The clicking of the bull’s hooves is a beautiful sound for our post-virus era,” declared a front-page editorial in the China Securities Journal, a state-run paper, on Monday.

The Shanghai Securities was more prosaic: “Hahahahaha! It looks more and more like a bull market!”

Similarly, a Xinhua story on Monday claimed investors were “running” into stocks and The Chinese Securities Journal ran a front-page editorial on the same day saying investors could look forward to encashing on a “healthy” bull market.

Now, when the Chinese media says something, that’s the Chinese government talking. And it seems that Chinese authorities are eager to push up stock prices, drive up consumer spending and accelerate the economic recovery.

Of course, if you’re a skeptic, you might say this is plain conjecture. Maybe all these state media outlets happened to amp up bullish sentiments at the same time on the same day in an uncoordinated and independent manner.

But wait till you find out what China’s “National Team” has been up to since Monday.

No, not the Chinese soccer team.

By “National Team”, we mean a shifting (and shifty) group of state-backed financial institutions orchestrated by the country’s financial regulators and driven by state funds. This cabal of Beijing-backed buyers is unleashed every time Chinese markets experience extreme volatility or a steep slump. This is when they enter the market, infuse a huge amount of capital, buy stocks and (artificially) bolster investor sentiment.

This group of professional investor cheerleaders has been active in recent days. Alongwith planted motivations by state media, they might have helped prompt the impressive market rally.

What are the origins of the National Team? Let’s go back to the first chart - of the CSI 300’s performance. Zoom into the part of the graph before 2015 and you’ll see a point where the index suddenly jumps to the sky. Here:

How the Chinese Government The Chinese market suffered a bubble burst in 2014, when stocks plunged by nearly half in just two months. To avoid a market collapse, the government created the National Team, which bought $28.8bn worth of shares to rebuild investor confidence. The result was that nice upward swing that you see in 2015.

That was neither the first nor the last example of a confirmed Chinese state-sponsored market confidence booster. In February this year, COVID-hit China suffered a devastating sell-off. The National Team duly stepped in with $14.3bn and a collapse was avoided...again:

How the Chinese Government Of course, the thing about forcing bullish sentiments is that you can’t keep doing it forever. Before long, reality sets in. That early-2015 stock rally? It resulted in a debt-fueled speculative bubble that duly burst, wiping out $5trn of value.

The financial dangers of these episodes aside, they do help shed some light on how the Chinese state guides its stock market.

Sometimes it’s through optimistic editorials in newspapers.

Other times it’s through forced interjections by the National Team.

Then there are the innumerable other ways in which China monitors traders, contacts investors when they break the rules, and mandates that brokerage firms police trades that are out of step with government wishes. The country’s notoriously powerful surveillance ecosystem helps greatly in these activities - in developing “penetrative supervision” of market participants (those were the words of the Vice Chairman of the China Securities Regulatory Commission, by the way).

As Fraser Howie, co-author of Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise, said, the thing about state support is that everybody believes it’s going to happen; it’s “part placebo, partly real”.

In China, it is the invisible hand of the state that guides the “free” market.

FIN.

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