China State Funds Sought to Cushion Blow as Stocks Tumble

(Bloomberg) -- Chinese state-backed funds were active in selected stocks on Monday, people familiar with the matter said, seeking to cushion the blow from a sudden escalation in trade tensions with the U.S.

Among the funds’ targets were two large oil companies, the people said, asking not to be named discussing private information. PetroChina Co., which fell as much as 3.5 percent in Shanghai, pared losses in afternoon trading to close with a 0.9 percent decline. China Petroleum & Chemical Corp. also spiked briefly, though it ended the day down 4.2 percent. Industrial and Commercial Bank of China Ltd., the country’s largest lender, displayed a similar pattern.

China State Funds Sought to Cushion Blow as Stocks Tumble

State funds stepped in after U.S. President Donald Trump threatened China with steeper tariffs, ramping up tensions in a trade conflict that many investors had hoped was nearing an end. While the large-cap stock moves helped major equity gauges close off their lows, the Shanghai Composite Index still finished down 5.6 percent, its steepest drop in three years.

Chinese authorities have a long history of intervening to smooth swings in the country’s $7 trillion stock market, though their efforts have had mixed success in recent years. Maintaining market calm may help President Xi Jinping’s negotiators project strength as they try to strike a trade deal without giving away too much to Washington. Past instances of Chinese market intervention have tended to become most visible during the afternoon, with sudden swings in stocks that have large weightings in benchmark indexes.

Not all investors have welcomed such moves. “The government needs to come up with a basket of solutions to alleviate the market’s key concerns, rather than resorting to a short-term boost to stock prices, which would only prove to be futile and nothing more than a window-dressing act,” said Raymond Chen, a portfolio manager at Keywise Capital Management Beijing Ltd.

Signs of government support also emerged outside the stock market on Monday. At least one big Chinese bank offered to sell the U.S. currency as the onshore yuan fell toward 6.80 per dollar, according to traders, limiting depreciation in the Chinese currency after it dropped the most in nearly three months. Separately, China’s central bank said it will set a lower reserve requirement ratio for mid- and small-sized banks focusing on local economies.

The China Securities Regulatory Commission didn’t immediately respond to a faxed request for comment.

While state funds helped ensure a steady bull market in Chinese stocks for much of 2016 and 2017, the government was widely criticized for its botched attempts to end a $5 trillion selloff in mid-2015.

This year, the Shanghai Composite is one of the world’s best-performing benchmark stock indexes. It’s up 17 percent even after Monday’s slide, buoyed by looser credit conditions in China and signs that Asia’s largest economy is stabilizing after a tough 2018.

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