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The CSI 300 Index ended down just 0.6% at the close on Tuesday, paring an earlier slump of 2.4%, which was its biggest intraday drop since August. State-related funds entered the market to buy local shares in the afternoon session, according to two people with direct knowledge of the matter, who asked to not be identified because the matter is private.
Meanwhile, U.S.-listed Chinese stocks gained overnight, with technology names including Alibaba (NYSE:BABA) Group Holding Ltd. and Pinduoduo (NASDAQ:PDD) Inc. leading the way. The Nasdaq Golden Dragon China Index rose 3.9% on Tuesday. The CSI 300 rose as much as 0.3% in early trading on Wednesday.
The move by state funds was intended to slow the pace of declines, one of the people said. Financial shares including brokerages were among those to have been purchased, the person said. Sub-gauges of cyclical sectors such as energy, utilities and financials posted gains in Tuesday’s session even as the benchmark ended lower.
The people didn’t provide information on the amount purchased or the frequency of such buying. The China Securities Regulatory Commission didn’t reply to a fax seeking comment.
Support from state funds, known as China’s “national team,” came as the mainland’s benchmark gauge looked set to erase its advance from Monday, when local markets reopened following the weeklong Lunar New Year holiday. The index plunged into a bear market before the break as worries about a weak economy and the property sector’s debt woes outweighed Beijing’s monetary easing, and efforts from the securities regulator, state media and mutual funds failed to lift sentiment.
National team’s “buying shows that stock prices are already at attractive levels, but the market may need some time to bottom out as investor sentiment recovers slowly,” said Jian Shi Cortesi, a fund manager at GAM Investment Management in Zurich.
Since the bursting of the stock bubble in 2015, Bloomberg has reported at least seven occasions of state funds interventions. On average, stocks continued to decline over the next three months, but at a slower pace, according to Bloomberg-compiled data. The CSI 300 fell by an average of 2.3% in the month after the reported intervention, compared with a loss of 5.1% in the previous month. The stock market did fare better over the ensuing six-month period, returning 5.5% on average.
Historically, Beijing has supported markets when needed around significant events or dates. The funds stepped in to stem a market rout during the National People’s Congress in March last year.
Unreasonable fear is detrimental to an economy, so “state-backed intervention to buy stocks makes sense, it is a well-targeted form of easing,” said Sebastien Galy, a macro strategist at Nordea Investment Funds SA in Luxembourg. “The next phase is to convince households and the market that the economy will rebound and China’s record is pretty solid.”
Stocks on the mainland have had a weak start to 2022 as the monetary policy divergence between Beijing and Washington — touted as one key reason for global brokerages to recently turn bullish on Chinese shares — has yet to lead to any meaningful gains. Even last month’s cut to a key interest rate failed to excite local traders, with the CSI 300 down 6.7% so far this year.
The gauge’s slump earlier Tuesday was driven by concerns over consumer spending as economic trends during the festive break — typically a boon for spending and travel — disappointed investors. While Chinese people traveled more compared with last year, the pandemic and restrictions to control outbreaks hurt domestic tourism spending, which fell from 2021’s already low level.
Consumer spending needs to pick up for China to start to “perform pretty well against the rest of the world,” Sean Taylor, Asia Pacific chief investment officer at DWS, said on Bloomberg Television. For now, people will want to move past the Olympics and seek more guidance from the government about stimulus, he added.
Bear Market
Local traders have followed global peers in dumping expensive stocks as bond yields rise. The tech-heavy ChiNext Index ended 2.5% lower, taking its losses from an August peak to 20% and pushing it into bear-market territory.
Tesla (NASDAQ:TSLA) battery supplier Contemporary Amperex Technology Co. plunged 6.7% in Tuesday’s session, while Kweichow Moutai Co. lost as much as 4.2% before finishing 1.6% lower.
Sino-American tensions could also add to bearish sentiment as the U.S. is said to be losing patience with China after the nation failed to meet its purchase commitments under their trade agreement. Separately, the U.S. Department of Commerce added 33 entities in China, including Wuxi Biologics Cayman Inc., to its unverified list. That drove a group of healthcare stocks to its lowest level in nearly two years.
READ: Wuxi Biologics Halted After U.S. Unverified List Sparks Selloff
Even if it’s true, “national team buying is a sign of weakness, not strength,” said Hao Hong, chief strategist at Bocom International in Hong Kong. The mainland equities “have clearly peaked” and volatility will continue, he added.
(Adds Wednesday’s performance in the third paragraph.)
©2022 Bloomberg L.P.
