By Tom Westbrook and Summer Zhen
SINGAPORE/HONG KONG (Reuters) – For the second day in a row, state-backed purchases likely sent Chinese stocks tumbling from multi-year lows. Investors doubt this support will be sustainable and warn it leaves markets unbalanced and unstable.
Formed in response to a stock market crash in 2015, the so-called “national team” of state-backed Chinese investors invested $17 billion in index funds last month and piled on Friday and Monday as markets were falling, analysts said.
These two days, the Shanghai Composite Index suddenly fell to a five-year low before recovering simultaneously with a sharp rise in turnover of index funds tracking blue-chip stocks.(. SS)
But analysts and investors say supporting the market with liquidity cannot be sustainable and will not enable a lasting recovery as long as the real estate sector remains weak and weighs on consumer and investor confidence. The task is also gigantic: the continent’s stocks are worth almost $9 trillion.
“This effect could be similar to that seen during the 2015 boom-bust cycle,” said Dennis Yang, a professor of business administration at the University of Virginia’s Darden School of Business.
“The short-term solution is unlikely to be sufficient to restore long-term confidence among global investors without addressing the underlying problems in the Chinese economy.”
In 2015, in a much more favorable economic context, the effect of purchases by “national teams” was questionable and in any case, it took months for the markets to find a bottom and more than five years for the CSI300 first-rate returns to its peak.
This time, analysts say similar buying has been evident for months — with S&P Global Market Intelligence tracking more than $17 billion in blue-chip tracking funds last month — but that there is no no solution in sight to the main growth problem.
“The Chinese economy is moving away from investments in infrastructure and real estate towards higher value-added industries,” said Ben Bennett, Asia-Pacific investment strategist at Legal & General Investment Management. .
“Recent stimulus measures attempt to ease the transition by focusing on symptoms such as slowing credit growth and stock market volatility. But the transition is still underway, so such policies can only have limited impact.”
QUESTIONABLE
The underperformance of Chinese markets is stark, as are signs that investor confidence and patience are running out.
Many market-oriented support measures, such as restrictions on short sales or reductions in customs duties, have also failed to stem the wave of sales, as have a number of government statements promising supportive but lacking in detail.
Most major investors say they are waiting for a spending program to help households. There has been no official confirmation of a Bloomberg News report reporting a 2 trillion yuan stock bailout fund.
“Consumers are facing multiple crises of confidence in debt, real estate and employment, underscoring the multifaceted challenges facing the Chinese economy,” said Michael Ashley Schulman, partner and CIO of Running Point Capital Advisors .
“The effectiveness of the market rescue… is questionable if it does not address weak overall demand or deeper problems in the property market,” he said. “Beijing’s historic market interventions have had short-lived impacts.”
Foreign investors sold 18.2 billion yuan ($2.5 billion) worth of Chinese stocks last month, marking a sixth consecutive month of capital outflows.
The index has fallen six months in a row, losing 20%, while global stocks have risen 5%. Small domestic investors are scrambling to buy funds that track foreign stocks.
Certainly, there are speculators who believe that Chinese stocks are so cheap that they represent market value. And the entry of state-backed investors could bend markets and open opportunities to follow the “national team” into index funds.
“The bailout is unbalanced, they are mainly bailing out core stocks (state-owned enterprises) and CSI 300 blue-chip stocks,” said Pang Xichun, research director at Nanjing RiskHunt Investment Management.
He recommends taking long positions in these public companies and shorting smaller companies. While not exactly an improvement bet, such a position – at least for now – can prove profitable. The CSI 300 ended Monday up 0.7% and the small-cap index down 6.2%.
($1 = 7.1963 Chinese yuan renminbi)
(Reporting by Reuters newsroom in Shanghai and Summer Zhen in Hong Kong; Writing by Tom Westbrook; Editing by Sonali Paul)
