(Bloomberg) — Chinese investors are putting their faith in the government to engineer a slow and steady rise in share prices, betting that previous periods of boom and bust have given regulators the tools needed to push back against wild price swings.
The benchmark CSI 300 Index has soared more than 20% from its April lows, and fund managers inside the country increasingly expect Beijing to rein in a rally that risks becoming a bubble. There are already signs of a pushback from regulators, who are now considering measures including the removal of some curbs on short selling and policies to dampen speculative trading.
Although these moves may cause short-term pain, they are also fueling hope among local investors that battle-hardened regulators and giant state-linked funds known as the national team can effectively stage-manage a prolonged rise in share prices.
“The conditions for a slow bull market this time are more ripe than the cycles of the past,” said He Wenpin, a fund manager at Beijing Youhe Private Equity Management Co. “The national team now has plenty of power over the trajectory of the major gauges, and it’s relatively simple for them to control the speed of index gains.”
The talk of a controlled rise is a sign of the euphoria in China’s stock market, where even down-days are seen as a stepping stone on the road to more gains. The CSI 300 Index was around 1% higher on Friday, paring some of its Thursday losses that came after a Bloomberg News report on regulators considering moves to quell speculative activity. The tech-heavy ChiNext Index also reversed course, rising 3.9% by afternoon trading.
The hope that Beijing can keep stock prices rising while avoiding speculative bubbles is based partly on sheer numbers: National team funds now own around $200 billion of exchange-traded funds, according to figures compiled by Bloomberg, giving them huge sway over the direction of stock prices.
But the confidence also comes down to the dizzying variety of official and unofficial policy tools available to the China Securities Regulatory Commission and other government departments. Unlike in previous periods of market volatility, regulators now have numerous levers they can pull — and plenty of experience in doing so.
Here are some of the tools.
China’s national team of state-linked funds is Beijing’s most powerful weapon to slow the bull run, but it is also potentially the most dangerous.
Central Huijin Investment Ltd and other state-linked funds now own at least three-quarters of each of China’s six largest ETFs, led by the $52 billion Huatai Pinebridge CSI 300 ETF. The implicit threat is that they could one day pare those positions to cool off rallies.
“If the market goes insane, I think it’s reasonable that they might sell some,” said Chen Da, founder of investment consulting firm Dante Research in Shanghai. “But you never know what kind of repercussions there will be, especially when we are just starting to see some bullishness after all these years. Sending that signal could easily lead things to overcorrect.”
That may encourage officials to rely on other big state-owned funds, who can sell stocks without fueling as much speculation that Beijing is fighting the market. That happened during a blistering rally in 2020, when China’s national pension fund and other investors said they were selling shares — briefly taking the air out of a rally that had made Beijing nervous.
A potential wild card is Beijing loosening its restrictions on short selling, which is permitted in China but expensive and hard to do. The removal of at least some curbs on short selling has recently been discussed by top policymakers, according to a Bloomberg News report citing people with the matter.
The CSRC increased margin requirements for short sellers a year ago, as stocks were sliding. At the same time, China Securities Finance Corp. stopped lending shares to brokerages, cutting off one of the country’s biggest sources of stock borrow. Those moves contributed to a sharp drop in the balance of short selling in the local market.
Regulators may also target single stocks or particular trading accounts, a limited way of sending a message to the wider market. The CSRC’s options include public warnings to investors, forced trading halts and the seizure of trading records and chat logs. Local brokers refer to these trading halts as placing stocks in “solitary confinement.”
Ningbo TIP Rubber Technology Co. whose Shanghai-listed shares jumped around the maximum 10% for nine sessions in a row, suspended trading on Thursday, citing a need to protect investor interests after abnormal fluctuation.
The CSRC could lift the minimum margin deposit ratio for brokers, after cutting it to 80% from 100% in 2023. Shanghai-based Sinolink Securities Co. raised its margin deposit ratio on some trades to 100% last month, the first public move by a broker to revert to the old limit.
Beijing may next attempt to slow the buying spree by raising stamp duty, or rolling back waivers on dividend tax payments. China halved the stamp duty on securities trading in 2023, part of a slate of policies to rev up trading after a years-long lull. The move saved investors around 250 billion yuan ($35 billion) in taxes over two years, according to estimates by the state-run China Economic Times.
Read: Why China’s Stock Market Rally is Causing Concern: QuickTake
The most painfree option, though, will be speeding up the registration of initial public offerings. Since these deals add to the supply of shares, they put downward pressure on secondary prices. But they also allow capital-hungry firms to raise cash — something that can ultimately help China’s shaky economy. In July, the Shenzhen Stock Exchange urged brokers to speed up applications to its tech-focused ChiNext board.
“Regulators have been keeping a light touch on investigating and punishing speculative trades, and the gates to IPOs are still tightly guarded,” said Yang Tingwu, fund manager at Fujian Tongheng Investment. “That may change if things start to get out of hand.”
Whether Chinese officials will ultimately use all of these tools remains to be seen, and depends in large part on whether the country’s rapid move higher in stock prices keeps going at pace.
There will also be suspicions of more familiar interventions along the way: As stocks were sliding Thursday, shares of Agricultural Bank of China Ltd. and Industrial and Commercial Bank of China Ltd. experienced a rapid jump higher, softening some of the market’s losses. The national team and China’s finance ministry are together the biggest shareholders in both.
(Updated adds quote in paragraph 20, updates market prices.)
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