China’s state-backed ‘National Team’ may rescue stocks from trade war woes

A security guard watches a screen showing newly-elected General Secretary of the Central Committee of the Communist Party of China (CPC) Xi Jinping speaking during a news conference, in front of an electronic board showing stock information at a brokerage house in Huaibei, Anhui province November 15, 2012.

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A security guard watches a screen showing newly-elected General Secretary of the Central Committee of the Communist Party of China (CPC) Xi Jinping speaking during a news conference, in front of an electronic board showing stock information at a brokerage house in Huaibei, Anhui province November 15, 2012.
source
Reuters

  • The “National Team” is a group of institutional investors that was formed after a sharp Shanghai Composite index correction in 2015.
  • The team could step in again soon as the US-China trade war escalates, analysts say.
  • Follow the Shanghai Composite Index in real time here.

As an escalating trade battle with Washington raises growth concerns in Beijing, Chinese stocks may get a helping hand from state-backed investors.

Deutsche Bank analysts Michael Tong and Luka Zhu wrote in a note to clients out Tuesday that it’s increasingly looking like the “National Team” has and will continue to intervene in China’s stock market. The group of institutional investors was formed after the Shanghai Composite index crashed in 2015.

“Examining the National Team’s past behavior, we find the team usually steps in to act as a market stabilizer when the stock market experiences a rapid and sharp correction or during politically-sensitive periods,” the analysts said.

On Tuesday, trade tensions helped send the Shanghai Composite to its lowest level since 2014, down more than 26% from its January high, and close to the key psychological level of 2,638. A swift rebound followed, raising questions about whether the National Team could be propping up equities.

“Several signs from recent weeks suggest the National Team is on the cusp of lending support to the current fragile stock market, especially given the latest US tariffs,” Tong and Zhu said.

The Trump administration imposed tariffs on $200 billion worth of Chinese products Monday night. China then responded by placing duties on $60 billion worth of American products. Economists warn those escalations, which dampened hope for any near-term resolution, could further slow Chinese growth.

Bloomberg reported in August that investors were supporting Chinese stocks and urging insurance companies to buy them. Blue-chip stocks outperformed following the story, a potential sign the “National Team” provided either direct or indirect intervention over the past few weeks.

“When the National Team intervenes in the market, it tends to prefer adding blue-chip index stocks to have an immediate impact on the index,” the analysts said. “By making insurance companies the direct source of funding, the government looks to be encouraging more long-term capital to participate as a ‘market stabilizer,'” the analysts said.

Institutional investors may also be motivated to act by more attractive valuations and low interbank borrowing costs, which it can leverage to strengthen its balance sheet.

The team held more than 1,100 stocks that were valued at more than $180 billion as of June 2018, Tong and Zhu estimate. It operates through at least 21 entities, including the China Securities Finance Corporation; Central Huijin Investment; Central Huijin Asset Management; five mutual funds set by the CSF; 10 managed accounts entrusted with asset management companies; and three wholly-owned subsidiaries of the State Administration of the Foreign Exchange.

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source
Deutsche Bank