China’s central bank has emerged as a key player in the nation’s stock market rescue

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Like many risk assets, Chinese stocks have been on a tear in recent weeks.

After falling to the lowest level seen since November 2014 in February, the nation’s benchmark stock index — the Shanghai Composite — has rallied more than 14%, helping to recover most of the ground lost earlier in the year.

Though any number of factors could be cited to explain the recent improvement, there’s little doubt that ongoing support from government-backed entities — known collectively as China’s “national team” — continues to support the market.

After an embarrassing collapse from June 12 last year, something that saw many mainland indices halve in the space of just a few months, it has been busy buying as others have fled, ensuring some spectacular and at times mind-boggling recoveries whenever stocks have come under pressure.

Although there are many counterparts who make up the so-called “national team” of investors, the two main bodies tasked with rescuing the market are China Securities Finance Corporation, owned by China’s securities regulator, the CSRC, and Central Huijin Investment, the domestic investment wing of the nation’s sovereign wealth fund, the China Investment Corporation (CIC).

According to analysis from Goldman Sachs, these entities spent a combined 1.8 trillion yuan on share purchases between June and November last year, buying heavily in an attempt to stymie mounting market losses.

Now, according to a report from the Wall Street Journal, there’s another major government entity that has entered the buying frenzy — the People’s Bank of China (PBOC), the nation’s central bank.

The WSJ reports that the Wutongshu Investment Platform Company, a firm operated by China’s foreign exchange regulator the State Administration of Foreign Exchange, or SAFE, has emerged on lists of top shareholders of various Chinese banks and brokerages as the end of 2015.

SAFE is a unit of the PBOC, meaning that China’s central bank, through its subsidiaries, appears to have joined the nation’s securities regulator and sovereign wealth fund in propping up the stock market.

Among the Chinese lenders in which Wutongshu took a major stake during the final quarter of 2015 were Bank of China, Shanghai Pudong Development Bank, Bank of Communications and Industrial and Commercial Bank of China, China’s largest lender by assets, says the Journal, citing the bank’s annual reports and a corporate filing released in recent weeks.

The WSJ, pointing to a story in the state-owned Shanghai Securities Newspaper, suggests Wutongshu and two subsidiaries bought shares valued at more than 27 billion yuan (US$4.2 billion) during the fourth quarter of 2015.

Though the intervention by the “national team” has no doubt helped to address the markets slide, the heavy involvement of state-backed entities has drawn ire from some market participants.

“The three main government bodies that run the economy, the financial system or regulate the market all have a direct stake in the market, literally,” Bank of America-Merrill Lynch wrote in a note to clients. “While many may view this as supportive of the market, we believe that allowing ‘referees’ to become ‘players’ is a slippery slope that could do damage to the market in the long run.”

Though buying from SAFE serves the dual purpose of not only underpinning the stock market but also helping to reduce capital outflows, there’s little doubt that the actions are creating a moral hazard.

Market participants are being rewired to expect the government to rescue stocks no matter what, leading to sky-high valuations and an inability to effectively price risk from many less sophisticated investors.

While central bank policy globally over the past seven years has helped risk assets to some enormous gains, the actions undertaken by the Chinese have taken this to another level.

At some point, market forces must be allowed to play out if we’re to believe that China is serious about implementing lasting and meaningful financial market reforms.

You can read more from the WSJ here.