China’s “national team” reduced its stock holdings dramatically in the first half of 2016 without derailing a market rally, defying predictions that withdrawal of government support would spark a resumption of last summer’s crash.
In early July 2015, with the Shanghai and Shenzhen equity markets in freefall following a year-long run-up, Chinese regulators deployed a coalition of state-owned financial institutions known collectively as the “national team”.
The market value of the national team’s holdings declined to 7.3 per cent of tradeable market capitalisation at the end of June from 11.9 per cent at the end of 2015, according to Financial Times analysis of data from Wind Information, a research firm. In value terms, the team’s holdings fell Rmb345bn ($52bn) to Rmb2.76tn — a decline of 11.5 per cent.
Analysts say the national team’s moves reflect opportunistic selling, as team members took advantage of a stronger market this year. Led by China Securities Finance Corp, team members borrowed heavily from state-owned banks to fund their purchases, so they need to turn a profit in order to repay loans without a government bailout of their own. But analysts also believe the team could return to the market if circumstances require.
“The decline in its holdings’ market cap does not necessarily suggest it is quitting,” said Hong Hao, head of research at Bocom International in Hong Kong. “As long as it has not paid down its debt and banks have not cancelled their lines of credit, then its total position should be considered as cash and credit plus stock holdings.”
While the data does not permit a precise estimate of what portion of the total decline in the value of national team holdings is due to share selling, as opposed to changes in stock prices, selling appears to be the dominant factor. The CSI300 index, which tracks blue-chips traded in Shanghai and Shenzhen, fell only 2 per cent in the second quarter.
The national team’s holdings are heavily concentrated in blue-chips, especially financial shares. The number of companies in which national team members appear among the top 10 shareholders fell by 362 since the end of 2015 and 147 in the second quarter alone.
The CSI300 index had gained 2.7 per cent so far in the third quarter. For the year it remains down 13.2 per cent, mainly because of a sharp drop in early January.
Intervention came at a cost to the team’s stake holders and market traders
– Hong Hao, head of research at Bocom International in Hong Kong
Wind Information draws data on national team holdings from listed companies’ financial statements, which include rankings of the top 10 shareholders. National team stakes that are too small to rank in the top 10 are not included in the total estimate.
“The national team’s holdings were low in the second quarter, but the index performed well. This shows the market is fairly resilient, especially considering the bearish external environment like Brexit, domestic regulatory crackdown, and deleveraging,” said Zhu Bin, strategist at Southwest Securities in Shanghai.
Despite the uneventful drawdown, analysts say it is still debatable whether the market bailout can be considered a success. With the CSI300 above 4,000 points in early July 2015 compared with 3,238.73 now, Mr Hong believes that the national team is still likely nursing paper losses. The interventions have also thwarted non-state investors looking to profit from market swings.
“The national team did indeed provide necessary liquidity during a market crisis, but it also suppressed market moves, making it difficult for traders to make money. Intervention came at a cost to the team’s stake holders and market traders,” he said.
Additional reporting by Ma Nan
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