When Stocks Crash, China Turns to Its ‘National Team’

(Bloomberg) -- It rose to prominence when China’s stock market imploded in 2015, spending billions of dollar on equities as the authorities scrambled to stem the losses. Media and market watchers regularly refer to it, but it’s rarely mentioned by Chinese officialdom. There were even questions this year about the desire to keep it going. But worry not, Chinese stockholders, the “national team” is here to (try to) save the day.

1. What is the national team?

It’s a nickname for the collection of state-related bodies that Chinese authorities lean on to buy stocks during times of turbulence. State-owned corporations have been purchasing shares since long before the 2015 crash. But the precipitous fall that year -- the Shanghai Composite Index dropped more than 40 percent from its peak in 2 1/2 months -- stoked fears about the stability of the financial system itself. That prompted a government-directed splurge on mainland shares, or A shares, as well as the injection of liquidity to some asset management companies.

2. Who are the key players?

Goldman Sachs Group Inc. defines the national team as government-related entities formed during the 2015 turmoil as well as “those that already existed before the market crash but were actively engaged in the A-share market during volatile times.” Although opinions differ, the following are often cited as key team members:

  • China Securities Finance Corp. -- founded in 2011 to provide funding to the margin-trading businesses of Chinese brokerages.
  • Central Huijin Investment Ltd. -- part of China’s sovereign wealth fund and established in 2003 to invest in state-owned financial enterprises. During the 2015 rout, a unit, Central Huijin Asset Management, was created to buy equities.
  • The State Administration of Foreign Exchange, the foreign exchange market regulator.
  • The government’s National Social Security Fund.
  • Some state-backed brokerages.
When Stocks Crash, China Turns to Its ‘National Team’

3. Why the concern about the national team’s future?

During the 2015 meltdown, five mutual funds were formed to purchase stocks with about 200 billion yuan ($29 billion) from China Securities Finance Corp. Those funds, however, were reported to have been liquidated in 2018, leaving traders wondering about the status of the national team at a time when the stock market was in freefall. It didn’t help that an article by a state think-tank in January had called for the exit of the national team. But in a rare acknowledgment of its existence, China’s securities regulator said in October that the market had misinterpreted news about the funds selling their holdings, assuring investors that “relevant institutions” had actually increased their positions. Analysts speculated that the government had redistributed money from the funds to other parts of the market.

4. How much market presence does the national team have?

Goldman Sachs estimates the national team held about $200 billion of mainland stocks as of the second quarter of 2018, making up 5.8 percent of freely-traded shares. While that’s significant, it’s also the case that the national team has been much less visible in the market this year, with few signs of heavy-handed intervention even as the Shanghai Composite Index fell about 30 percent from its peak.

5. How effective is the national team?

Market participants say the mere knowledge of a big buyer provides a confidence boost when nerves are jittery. That’s especially important in China, a rare market where retail investors dominate trading. The national team helped equities to find a bottom in early 2016, but more recently, long-suffering investors have again been disappointed. The Shanghai Composite is one of the world’s worst-performing benchmark stock indexes in 2018, and the amount of money traded each day on China’s exchanges has never recovered to pre-2015 crash levels.

6. Do other countries prop up their stock markets?

Yes. Japan’s central bank spent 2.4 trillion yen ($21 billion) on bank stocks to stabilize the financial system from 2002-2004 and 2009-2010, according to the Asian Development Bank Institute. More recently, it’s been buying exchange-traded funds as part of its stimulus program. In 1998, Hong Kong’s government bought billions of dollars’ worth of equities to stem a market rout. Taiwan set up a fund to support stocks in 2000 and South Korea is planning to do the same. What’s different with China is the sheer scale: It was reported in 2015 that, in order to avert the meltdown, China Securities Finance Corp. had access to as much as 3 trillion yuan ($431 billion) of borrowed funds from sources including the central bank and commercial lenders.