China state funds start selling in warning sign for stock rally

A rally in Chinese stocks had added about US$1 trillion to equity values.
A rally in Chinese stocks had added about US$1 trillion to equity values.PHOTO: REUTERS

BEIJING (BLOOMBERG) - Chinese megacap shares fell on Friday (July 10) after two state-backed funds trimmed their holdings in a sign that the government wants to slow down the rally.

People's Insurance Company (Group) of China, which had become a poster child of the ramp-up in equities with a 28 per cent surge this month, sank as much as 7.8 per cent in Shanghai. The SSE 50 Index of the city's largest stocks was 1.6 per cent lower at the mid-day break. The gauge had closed on Thursday within 2 percentage points of its intraday peak in 2015.

China's National Council for Social Security Fund -- the country's national pension fund and PICC's second-largest shareholder - outlined its intention to sell a 2 per cent stake in the insurer in an exchange filing late on Thursday. The fund, which oversees about 2.2 trillion yuan (S$437.7 billion) in assets, said the sale was part of its "regular divesting activities."

"The signal could not be clearer - stocks have just become too hot for the regulators' liking," said Niu Chunbao, a fund manager at Shanghai Wanji Asset Management Co. "A slight dip or so may put their minds more at ease at this point."

A rally in Chinese stocks has added about US$1 trillion (S$1.39 trillion) to equity values this week - far outpacing gains in every other market worldwide. Signs of euphoria among the nation's investing masses are popping up everywhere: turnover has soared, margin debt has risen at the fastest pace since 2015 and online trading platforms have struggled to keep up.

The securities regulator this week also took steps to cool down speculative behavior. It published a list of 258 illegal margin financing platforms on Wednesday, some of which had provided leverage as high as 10 times. The China Securities Regulatory Commission also warned investors to stay away from the unauthorized platforms.

The National Integrated Circuit Industry Investment Fund Co. -- a far smaller state-backed semiconductor fund aimed at fostering China's homegrown chipmakers - also announced plans on Thursday to offload shares in three firms. Textile maker Wuxi Taiji Industry Co., Shenzhen Goodix Technology, and Beijing BDStar Navigation fell at least 2.5 per cent.

The role of state-backed funds in China's market landscape became apparent during the 2015 stock rout, when firms like China Securities Finance Corp and Central Huijin Investment worked to counter big equity losses.

Foreign investors turned net sellers of Chinese shares for the first time this month on Friday, dumping a net 2 billion yuan as of the mid-day break. They had pumped a net 63 billion yuan across the border via exchange links in July.