Strengthening the Stock Market Further

In recent developments within the Chinese financial landscape, the Central Huijin Investment Co., Ltd., often regarded as a heavyweight investor in the market, has further consolidated its grip on key financial entitiesThe Ministry of Finance has recently transferred its equity stakes in three major national Asset Management Companies (AMCs) and the China Securities Finance Corporation (commonly referred to as "the margin financing company") to Central HuijinThis move has sparked widespread speculation in the market, with analysts suggesting that it might be a precursor to the establishment of a stabilization fund.

According to Tsinghua University’s National Institute of Financial Research Director, Professor Tian Xuan, the transfer of shares to Central Huijin will allow the company to respond more effectively to market fluctuationsHe noted that such a consolidation might facilitate actions aimed at stabilizing the stock market, like timely market interventions and financial support, thereby reinforcing market confidenceNonetheless, he emphasized that the primary objective of this equity transfer is to optimize the management of state-owned financial capital, enhance capital usage efficiency, and fortify the entire financial ecosystem against risksHe further indicated that the rescue efforts would still adhere to market principles and be subjected to regulatory oversight, arguing against a simplistic correlation between this transfer and an increased ability to support the market.

Central Huijin has long served as a stabilizing force during volatile periods in the capital marketsFor instance, in situations where the stock market faces downward pressure, such as the significant downturn observed in July 2015, Central Huijin has played a crucial role by bolstering liquidity through investments in bank stocks and exchange-traded funds (ETFs). Just recently, on October 11, 2023, major state-owned banks issued announcements detailing Central Huijin’s substantial investments across multiple financial institutions

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This action was framed within a broader strategy of sustained engagement in the secondary market to instill confidence amongst investors.

Market analysts, including those from CITIC Securities, have pointed out that the organizational shift brought on by this equity adjustment positions the "state team" for improved coordination in managing financial assetsThis is seen as a significant move to underline the government’s commitment to maintaining financial stability and boosting investor confidence in the financial marketsThe specialized nature of Central Huijin as a government-authorized financial holding company indicates its capability to leverage its resources effectively, regulating the market and minimizing excessive volatility.

The discussions surrounding the creation of a stabilization fund have gained tractionHistorically, there have been calls for establishing such a fund every time market fluctuations occurThe recent share transfers have intensified these speculations, even though, as Tian Lihui of Nankai University pointed out, there is currently no direct evidence linking the recent equity handovers to groundwork for a stabilization fundHowever, considering the growing uncertainties in the global economy, there is a valid argument for implementing such a fund to ensure market stability, mitigate systemic risks, and protect the interests of small investors.

The concept of a stabilization fund has seen practical implementations in various countries, including Japan and South Korea, further exemplifying the potential benefits of such measuresTian continued to elucidate that the scale of a potential Chinese stabilization fund could likely fall within 2% to 6% of the total market capitalization of the A-shares, which currently sits around 90 trillion yuan, translating to a fund size of approximately 2 to 5 trillion yuan.

He further explained that a well-structured stabilization fund should be managed by a government authority, with its scale being contingent upon market valuations and the prevailing economic climate

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The funds could be derived from several sources, including budget allocations from the government, injections of state capital, and supportive policies from financial institutions.

In practical terms, Tian highlighted that such a fund would need to take buying positions during market downturns, specifically targeting blue-chip stocks and ETFs, while selling during bull runs to stabilize the marketplaceHe emphasized that an essential component of this initiative would be maintaining transparency and regulatory oversight to cultivate investor trust.

Turning the focus back to the AMCs, the share transfers also play a pivotal role in the current market climateThe significant challenges faced by the real estate sector and the changing market environment underscore the plight of these financial institutionsFor instance, China Cinda Asset Management Co. has recently projected a stark decline in its net profits for 2024 compared to 2023, attributing this downturn to adjustments in business structures and shifting market conditions.

The CITIC Securities report noted that upon completion of the share transfer, the Ministry of Finance would relinquish its management functions and strictly focus on its regulatory roles, with Central Huijin taking the reins of these AMCsThis aligns with the aim to enhance market efficiency in managing financial capital and risk mitigationThe integration of the three AMCs into Central Huijin’s governance structure holds the promise for improved synergy and resource optimization across different financial sectors.

With Central Huijin’s extensive network spanning banks, securities, and insurance sectors, there emerges an opportunity for the AMCs to foster deeper collaborations and optimize the disposition of non-performing assets, amongst other venturesThe potential for enhanced operational efficiency is considerable, which could contribute to a more resilient financial system as a whole.

The historical debt issues faced by these AMCs pose another question altogether