MNI: China Stock Stabilisation Fund Talk Premature-Advisors

MNI (BEIJING) - Calls for Beijing to establish a stock market stabilisation fund are likely premature, particularly as the A-share market continues to perform, advisors and analysts told MNI, noting policymakers will pursue its introduction in due time to encourage more long-term investors.

“While the market awaits clearer signals, it is not a good timing for the entry of a stabilisation fund,” said a researcher at a government-backed think tank, noting A-shares could rise further after the Standing Committee of the National People’s Congress details its additional fiscal stimulus plans later this week. “However, the U.S. election result could add uncertainties to emerging trends."

Calls for the establishment of a stabilisation fund – created via the issuance of additional special treasuries – have elevated expectations, but replenishing large state-owned bank capital and resolving local government debt remained a higher priority for government, said Wei Hongxu, analyst at think tank ANBOUND.

“The timing of a stabilisation fund would be more effective when the market was irrationally falling,” Wei added, noting recent pro-growth measures, such as the central bank’s CNY800 billion capital market financing support tool, had helped restore investor confidence. (See MNI INTERVIEW: PBOC Moves, Stimulus To Boost Stocks-BOC's Zong)

LONG-TERM FUNDS

People’s Bank of China Governor Pan Gongsheng’s recent comment that the stabilisation fund was “under study” meant it was unlikely to materialise in the short term, said Li Xunlei, chief economist at Zhongtai International. However, the fund would be necessary in future given authorities’ plans to improve risk appetite and the scale of long-term stock investment, Li added. 

Equity allocations by pension and insurance funds account for only 10-20% of their total investment, far below the international standard of about 50% and the upper limit of 40-45% stipulated by Chinese regulation, Li highlighted. 

SUSTAINABLE SOLUTIONS

Authorities would need a fund of about 5% of the share market’s total value, currently about CNY80 trillion, to make it effective and help reduce A-share volatility, the researcher said. Such a fund will provide better legal status and more transparent information disclosure than unofficial “national team” interventions by state-owned investment companies, and help promote value investment by allocating to blue chip stocks, and ETFs, the advisor added.

Wei emphasised longer-term improvements to stability needed broader reforms, such as improving the governance of listed companies. (See MNI: Reforms Needed To Consolidate China’s Stock Rally) “Authorities need to ensure the fund does not distort market pricing mechanisms and design an exit mechanism carefully,” Wei said, noting it should only operate as needed and not become a long-term arrangement.