In past articles, we have pointed to the fact that government stimulus directed at the economy or the stock market has little effect (2016, 2014, 2011, 2009). So it is with little wonder that we look at the situation of the Shanghai Composite Index for indications of the effectiveness of direct stock market intervention by the Chinese government.
On June 27, 2015, after the Shanghai Index had declined more than –20%, the government stepped in to shore up the stock market with a surprise interest rate cut. That rate cut and many other actions that followed was cause for many analysts to carry on with the superstitious belief that government intervention could stop stock market declines and actually boost the market. Many analysts were openly recommending Chinese stocks since the government had openly declared a goal to stop the stock market decline.
The following is a list of known interventions that was presented by Quartz Media writers Heather Timmons and Lily Kuo published on July 28, 2015 in an article titled “A complete list of the Chinese government’s stock-market stimulus”:
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June 27: A surprise 25 basis point interest rate cut and lowering of the reserves banks need to keep when they lend to companies.
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June 29: Regulators say pension funds can invest 30% of their net assets (equivalent to more than $100 billion) in equities for the first time.
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July 1: China’s securities regulator relaxes rules on margin financing, or trading stocks with borrowed money.
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July 3: China’s central bank extends a 250 billion RMB ($40 billion), six-month loan to state owned banks to “encourage banks to increase support” to weak parts of the economy.
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July 4: 21 brokerages, led by Citic Securities, say they will invest $19.3 billion in a new blue-chip fund to stabilize the market, and vow not to sell any of their own proprietary equity holdings.
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July 5: 28 firms planning IPOs on the Shanghai and Shenzhen market say they will postpone them and start refunding investors’ capital.
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July 5: China’s central bank says it will inject an undisclosed amount of capital into China Securities Finance Corp (CSF), a state-owned company that makes margin loans to brokers.
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July 6: Executives from mutual funds pledge to support the markets with their own capital.
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July 8: Regulators banned company shareholders with stakes of more than 5% from selling for the next six months. China’s central bank said it would further support the margin lending provider CSF through interbank lending, bond issuance, and collateral backed financing and re-lending. China’s securities regulator also said it would increase purchases of small-cap stocks.
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July 9: China’s banking regulator, the CBRC, said banks can now loan money to companies using stock as collateral, and ease margin requirements for wealth management customers.
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July 9: China Development Bank and the Export-Import Bank of China said they would not sell shares, and look to buy more stock.
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July 27: Margin lending provider CSF will continue to buy stocks to stabilize the market, and China’s stock market regulator, the CSRC, will investigate “huge stock sell-offs,” the CSRC said.
Since the initiation of these government actions to prop up the stock market, the Shanghai Composite Index declined an additional –34.40% to the low of January 28, 2016 and three years later lingers at a loss of –18.40% based on the starting point of the market stimulus of June 27, 2015. In total, the Shanghai Index is down –35.98% from the peak on June 12, 2015.
We cannot emphasis enough how government stimulus has marginal long-term impact on the direction of the stock market and the economy. Interestingly, buyers of Chinese ETFs at the current levels would be considered value investors as opposed to those buying in 2015 based on government promises to prop the market.