China's sovereign wealth fund bets big on a stock market recovery

AIKOU, CHINA – DECEMBER 1: (CHINA OUT) A volunteer worker plays with a condom during an event organized by the local government to promote HIV/AIDS awareness on December 1, 2005 in Haikou of Hainan Province, south China. China pledged to keep the number of people living with HIV/AIDS below 1.5 million by 2010, Health Minister Gao Qiang said at a press conference. (Photo by China Photos/Getty Images)

The reason for the sharp turnaround in China’s stock market on Wednesday has been partially resolved and, unsurprisingly, it appears to be an all too familiar reason – state-backed buying across the markets.

According to a report in the South China Morning post, Central Huijin Investment, a Chinese state-backed subsidiary of the China Investment Corporation, used more than 20 billion yuan ($3.125 billion) to increase its stake in Chinese banks during Wednesday’s trading session.

The China Investment Corporation, or CIC, is China’s sovereign wealth fund.

Bank of China, Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, China Everbright Bank, and state-owned New China Life Insurance notified the Hong Kong stock exchange on Wednesday evening that Central Huijin increased its stake in their A-shares through transfer agreements, said the report.

While financials were one of the worst performing sectors on Wednesday – it closed the session up 0.28%, a far cry from the 1.24% gain registered for the broader Shanghai Composite index – the revelation that state-backed firms are continuing to support stock prices was likely enough to prompt a wave of bargain hunting in recently beaten down stocks.

The price action witnessed yesterday certainly backs this view. Having fallen more than 5% in early trade, the Shanghai Composite roared higher in afternoon trade, finishing the session up 1.24%.

The intraday range was an amazing 6.75% – remarkable to Western investors but only the 11th-largest seen so far in 2015.

So what lies ahead for China’s stock market today? Given the trading range for the Shanghai Composite has been over 6% both Tuesday and Wednesday, it’s a safe bet that it’s likely to be more volatility.

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