In a Chinese stock market obsessed with round numbers, 3,500 has emerged as the latest make-or-break level for traders trying to gauge the staying power of state support. Signs of government buying have appeared at that price on the Shanghai Composite Index (SCI) at least four times over the past six weeks. The latest example came on Wednesday, when the gauge posted an intra-day rally of 6.6 per cent after falling to as low as 3,558.
Speculation around the government's intentions has escalated since Friday, after China's securities regulator signalled authorities would pare back an unprecedented campaign to prop up share prices as volatility falls. While policy makers have a long history of defending key levels on the SCI, their role in supporting the market has taken on even greater importance as China's wealthiest traders join an exodus of foreign investors in the wake of a $4 trillion crash.
"All eyes are focused on whether the government will shore up the 3,500 level," said Nelson Yan, chief investment officer at the Hong Kong unit of Changjiang Securities. "Any inaction could trigger a new round of selling."
The government has armed a state agency with more than $400 billion to bolster share prices and told state-owned companies to buy stocks. It's seeking to prop up the market, after a drop of more than 30 percent in the SCI threatened to undermine confidence in President Xi Jinping's ability to manage the economy.
Share buybacks
The benchmark gauge fell as much as 8.2 per cent to 3,421 on July 8, before paring losses to close above 3,500. The following day, the gauge surged 10 per cent off its intra-day low of 3,373. On July 28, the measure rebounded more than six per cent after touching nearly 3,537.
Evidence of government support at closely watched levels in China's stock market stretch back to at least June 2005, when the SCI briefly fell below 1,000. The regulator responded by urging funds to stabilise the market and allowing companies to buy back their shares.
Failure to defend such levels risks accelerating losses. Analysts at Macquarie Group and Guosen Securities speculated at the end of June that authorities would intervene to keep the index above 4,000. After the gauge closed below that level on July 2, shares fell a further 10 per cent over the next four days. The SCI fell 1.3 per cent at 1:24 pm local time, heading for its lowest close in two weeks.
Even as the state buys, investors with the most at stake are cashing out amid signs of a deepening economic gloom.
The number of traders with more than ¥10 million ($1.6 million) of shares in their accounts shrank by 28 per cent in July, while those with between ¥1 million and ¥10 million declined by 22 per cent, according to data compiled by China Securities Depository and Clearing.
International investors have sold $7 billion of Shanghai shares through an exchange link with Hong Kong since July 3.
"More investors may be taking the opportunity of state buying to unload their holdings, as growth prospects for China are looking dimmer," said Bernard Aw, a Singapore-based strategist at IG Asia Pte Ltd.
A weaker yuan is also reducing the attractiveness of Chinese assets. The currency plunged the most in 21 years last week after the central bank unexpectedly devalued it.
China Securities Finance Corp., the state agency tasked with supporting share prices, will remain in the stock market for years to come, the China Securities Regulatory Commission said, although the agency will no longer add to holdings unless there's unusual volatility and systemic risk. The fund transferred some shares to Central Huijin Investment Ltd., a unit of the nation's sovereign wealth fund, the CSRC said.
'Canny traders'
Even if state-backed buyers hold the line at 3,500, the Shanghai Composite may struggle to surpass 4,500 - a target Chinese brokerages cited when they unveiled a market support fund on July 4. The gauge plunged 11 per cent in three days after it closed at 4,123.93 on July 23.
Clear levels of state support are "great for canny traders," said Michael Every, head of financial markets research at Rabobank Group in Hong Kong. "Buy on the way up as government bids higher - then sell at the level they have flagged as a target. Rinse and repeat. The government carries the can."
