Chinese government-backed funds snap up stocks to halt plunge

HONG KONG — Funds backed by the Chinese government on Tuesday bought shares to limit the rout in domestic stocks after China’s main index tumbled into correction territory.

Traders said that brokers linked to the funds, which often are referred to as the “national team” for the role they play in stopping rapid falls in China’s equity markets, were active in morning trading in the mainland and through the cross-border Stock Connect program, which allows investors in Hong Kong to buy yuan-denominated shares.

The support, which comes amid the National People’s Congress meeting in Beijing helped the markets trim losses for the day. The NPC is the most important governmental event of the year in China, where authorities monitor market developments closely.

The CSI 300 Index, which tracks the largest stocks listed in Shanghai and Shenzhen, reversed course on Tuesday after the funds jumped into the market and started buying. It had dropped as much as 3.2% during Tuesday trading and by the end of the morning session had erased nearly all of its losses. The downtrend gathered momentum again toward the close.

The index closed 2.2% lower, taking losses to nearly 15% from the all-time high last month and posting declines for four consecutive days, the longest streak since early December. The index fell 3.5% on Monday, its biggest single-day drop since July.

The market correction comes less than three weeks after Chinese shares raced to an intra-day record as markets reopened after the Chinese New Year holiday in mid-February.

  © Reuters

The MSCI Asia-Pacific ex-Japan Index was 2% lower in late afternoon on trading, while Japan’s Nikkei 225 ended up 1%.

Corrections refer to when stocks fall 10% from recent highs. This one comes less than three weeks after Chinese shares raced to an intraday record as markets reopened after the Chinese New Year holiday in mid-February.

“The buying by the national team is the only reason why mainland stocks avoided further annihilation today,” said Steven Leung, executive director of institutional sales at UOB Kay Hian in Hong Kong. “While fundamental factors such as liquidity and corporate earnings growth remain positive for medium- to long-term investing, there are concerns over the recent run-up in share values.”

Investors have dumped stocks on fears they are overvalued and are vulnerable to rising U.S. bond yields. They also have been worried over a faster-than-expected fiscal and monetary policy normalization in China after regulators warned of asset bubbles.

The U.S. 10-year Treasury bond yield briefly rose as high as 1.61% on Monday to its highest level in more than a year on hopes of a strengthening economic recovery. The Asia investment grade dollar bond index also suffered its biggest sell-off in a year with spreads surging.

The rise in yields is putting pressure on growth stocks, such as technology companies, since it can hurt expectations for future cash flows denting valuations. As a result, investors are fleeing to beaten-down stocks — such as financials and retail — that can gain from an economic recovery.

“Investors are focusing on short-term concerns over policy and liquidity normalization,” said Tai Hui, chief Asia market strategist at J.P. Morgan Asset Management in Hong Kong. “We believe the conditions for such policy normalization, including stronger growth momentum, a pickup in consumer sentiment and a brighter business outlook are all positive for earnings prospects over the next 12 to 18 months.”

He said the correction paves the way for investment in structural growth stocks, such as the government’s push toward greater investment in technology, consumer spending and carbon-emission reduction.

China is targeting economic growth of at least 6% this year, aiming for 7% annual growth in research and development spending through 2025 and rapid urbanization.

Over the past two years, the CSI 300 Index has bounced back twice after falling more than 10%, with traders saying state-fund intervention put an end to the sell-offs.

Four sectors — industrials, utility, energy and real estate — were gainers on Tuesday, with tech leading the losses. Out of the 300 component stocks in the CSI 300 Index, 186 ended in the red.