China’s tools to prop up its stock market: Warnings, increased liquidity

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Investors watch the stock market at a securities industry hall in Fuyang city, east China’s Anhui province, 29 December 2023.

CFOTO | Future Publication | Getty Images

China’s financial authorities have been trying to boost the country’s stocks through various measures, including measures aimed at increasing market liquidity, warnings against abuses and falling back on proverbs.

With onshore markets already paring gains after the People’s Bank of China announced measures to boost liquidity last month, there are doubts whether this familiar playbook in Beijing will have a significant impact on markets.

On Tuesday, Central Huijin, a unit of sovereign wealth fund giant China Investment Corporation, said it had expanded purchases of exchange-traded funds linked to the country’s onshore stocks to protect market stability.

This follows a series of statements over the past few days by China’s securities regulator aimed at calming investor nerves, including a promise to “guide” institutional investors to increase investment and encourage companies to make higher buybacks.

The China Securities Regulatory Commission had also warned on Monday against “malicious” short selling and said it would suspend an investigation into margin financing after a volatile trading session. On Sunday it had made sure to protect investors’ interests after onshore markets fell as much as 3% before paring losses on Friday.

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“Here’s a warning: don’t test the law or you’ll end up picking chestnuts from the fire,” the country’s security regulator said late Monday, in CNBC’s literal translation of two Chinese proverbs.

These moves are reminiscent of previous attempts to stop market movements. Central Huijin is part of the “national team” of Chinese state-linked investors hired to dig up the stock market with strategically timed purchases.

Social stability is central to President Xi Jinping’s approach to “high-quality” financial development, which adheres to “a combination of the rule of law and the rule of virtue.”

Market volatility

The CSI300 index of the most liquid Chinese blue chips listed in Shanghai and Shenzhen climbed as much as 1.7% on Tuesday after the Central Huijin announcement, extending a rebound from five-year troughs.

The benchmark closed up 0.7% on Monday in a volatile session that saw the index down as much as 2.1%. It is still down almost 5% this year.

The worst level of volatility however has been with the small and mid cap names, preferred by quantitative hedge funds among other professional investors.

The CSI1000 rose as much as 2.6% on Tuesday, rebounding from a lower set higher on Monday. It is still down more than 25% year to date, compared to the 4.9% drop for the CSI300.

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The CSI 1000 index of small and mid-cap names is one of the most popular underlying benchmarks for derivatives, futures and other structured products.

Bloomberg reported late Monday that China was tightening trade restrictions for domestic institutional investors as well as some offshore entities.

In a speech last month, Xi said that financial management must be “difficult” and sharp, while every effort should be made to prevent and resolve financial risks, especially systemic risks in order to culture to foster finance with Chinese characteristics.

Bloomberg also reported that Chinese regulators were ready to brief Xi as soon as Tuesday on the state of the financial markets.

China’s central bank’s 50 basis point cut to reserve ratio requirements, announced on January 24, took effect on Monday. It will inject 1 trillion yuan ($139.8 billion) in long-term capital into the market ahead of the week-long Lunar New Year holiday.

“In the risk management process, corruption must be punished firmly and moral hazard must be strictly prohibited,” he said.

— CNBC’s Evelyn Cheng contributed to this story.

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