China's next stimulus step could be direct share purchases by its central bank

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  • Anyone who has been following Chinese financial markets in recent years would know about the so-called “National Team”.
  • It’s the nickname given to a group of government-linked institutions that are tasked with intervening whenever markets moves are deemed as being undesirable for Beijing.
  • Nomura says China’s central bank may be about to join the team. Specifically, it may be mandated by the government to buy Chinese stocks.
  • It says this may annoy US President Donald Trump given he often measures economic success by the performance of the stock market.

Anyone who has been following Chinese financial markets in recent years would know about the so-called “National Team”, the group of government or government-backed institutions that are often called upon to quash market moves deemed undesirable by Beijing.

Well, another important member may be about to sign on.

Following the lead provided by the Bank of Japan and other smaller central bank’s beforehand, Nomura’s Global Markets Research team says 2019 may be the year when China’s Central Bank, the People’s Bank of China (PBoC), will begin to make direct purchases of Chinese stocks.

“We believe the value of China’s stock market is extremely important to the Chinese authorities,” Nomura says.

“While residential property is the main asset class for domestic savings, we note that China’s stock market is dominated by retail investors.

“We think China may consider using its central bank as a vehicle to buy into the stock market.”

As Nomura explains, direct stock purchases by China’s National Team have already occurred in the past, most noticeably in 2015 when it attempted, and eventually prevailed after some early failures, in stabilising stocks after an enormous, bubble-popping selloff.

“China’s government has been active in its equity market in the past,” it says.

“In 2015, shares in MSCI China fell 34.7% peak to trough during April to September, prompting the Chinese authorities to buy equities through various entities.

“It is estimated that these entities — which include the State Administration of Foreign Exchange (a division of the PBoC) — control around 3% of the domestic, A-share market.”

So why would the government turn to its central bank to buy Chinese stocks, especially with other, more established policy tools, at the PBoC’s disposal?

Nomura says there’s several reasons, including to annoy a man who often measures economic success by the performance of stocks, US President Donald Trump.

“We see China’s ability to use the PBoC to become an investor in the stock market as a further frustration for Trump, who openly dislikes the lack of ability for the US government to influence the Federal Reserve,” it says.

From a more fundamental perspective, at a time when the Chinese government is looking to stabilise the economy and encourage consumption-led growth, it says direct stock buys may be able to achieve the desired result without the need to deliver broad-based policy easing.

“A stronger stock market in China would help the Chinese authorities rebalance GDP composition towards consumption,” Nomura says.

China’s economy grew at the slowest annual pace since the GFC in the September quarter of last year. Many expect the economy decelerated even further in the December quarter. Official data from the government will be released later this month.

Chinese stocks have also endured a tough period over the past year with the benchmark Shanghai Composite Index down 30% from the peak in January last year.

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