Investments signal State backing for A shares; stabilization fund in focus

Central Huijin Investment Ltd, an arm of China Investment Corp, the nation's sovereign wealth fund, has increased its holdings of Chinese equities for the second time in half a month, helping the A-share market to end Tuesday on an upbeat note.

Analysts said Central Huijin's move has reinforced the policy signal of shoring up the capital market amid efforts to stimulate the national economy. Possible policy options in the current scenario, they said, could be expanding the funding source for Central Huijin's stock purchase and establishing a State-backed market stabilization fund.

In a brief disclosure on Monday, Central Huijin said it had bought exchange-traded funds (ETFs) on Monday and will keep increasing its holdings. It, however, did not disclose any specific purchase amount and targets.

ETFs refer to a type of investment fund that is traded on stock exchanges much like individual stocks but holds assets that are designed to track the performance of a specific index.

The latest purchases came shortly after the State fund's announcement on Oct 11 that it had increased its stake in China's four biggest commercial banks and plans to further boost holdings in the banks in the coming six months.

Buoyed by Central Huijin's move, China's A-share market rallied on Tuesday, led by the SSE STAR Market 50 Index, which tracks China's Nasdaq-style STAR Market. It rose by 1.25 percent to close at 850.61 points.

The benchmark Shanghai Composite Index climbed by 0.78 percent to close at 2962.24 points. Analysts said Central Huijin had probably bought into ETFs linked to the blue chip-heavy CSI 300 Index on Monday. On Tuesday, the index rose by 0.37 percent to 3487.13 points, having rallied in afternoon trading on Monday.

Hong Hao, chief economist at GROW Investment Group, said Central Huijin's buy is a "decisive move" to shore up investor sentiment. The market has responded favorably, he said.

"I think Central Huijin can buy Hong Kong-listed stocks as well because they are even cheaper than their A-share counterparts."

Analysts at Nomura Orient International Securities said in a report that the size of Central Huijin's ETF purchases might beat market expectations.

That is because the company may not only use its own cash to buy A-share ETFs — it had about 29.7 billion yuan ($4.06 billion) by the middle of the year, according to its semiannual report — but may access the funding provided by potential special treasuries issued by the central government and dividends of its own financial subsidiaries.

"If market performance continues to be weak, it is possible for Central Huijin and other institutions to accelerate increasing A-share holdings. Such an expectation can facilitate the A-share market bottoming out," the Nomura report said.

Yang Haiping, a researcher at the Institute of Securities and Futures, which is part of the Central University of Finance and Economics, said it is also necessary to establish a State-backed stabilization fund to deal with any pressure of capital flowing out of the A-share market.

"The US Federal Reserve may maintain high interest rates for a longer period of time while China needs to promote reductions in financing costs, which could lead to capital outflows. Financial attacks of different types cannot be ruled out as well, entailing the establishment of a fund to stabilize stock market performance," Yang said.

According to market tracker Wind Info, the A-share market saw a net 42.2 billion yuan flow out via the stock connect programs with the Hong Kong stock exchange this month as of Tuesday amid elevated US Treasury yields, which analysts said have been one of the key factors weighing on Chinese equities.

Yang said China's capital market needs bolder reform steps to strengthen the crackdown on listed companies' legal breaches so that small investors' legitimate rights can be better protected. A stabilization fund may be necessary to ensure market stability while such reforms are deepened.

Given the continuous launch of policies supportive of the stock market and the Chinese economy, David Huang, a senior investment strategist at AllianceBernstein, said now could be the right time to gradually accumulate positions in A shares.

"Considering the current reasonable valuation after a market downturn as well as successive policy supports, A shares are expected to fare relatively well in 2024," Huang said.