Some foreign investors have found a new and simple way to make money from China’s dysfunctional stock markets — by dispensing with market research and playing “follow the leader” instead.
Rather than crunching data on earnings and stock valuations to come up with investment strategies, they are mimicking China’s so-called “national team” — a group of state-backed financial institutions tasked with propping up share prices.
When this team of brokers, fund managers, and insurers intervene to buy up shares at the behest of Beijing, foreign investors quickly follow suit and purchase the same stocks.
The end result — investors say — is that China’s national team is unwittingly encouraging short-term trading patterns that amplify the detachment of stock markets.
“Some of the recent policy measures taken by China’s authorities in the markets have been quite puzzling and it hasn’t really increased confidence among foreign investors,” said Karine Hirn, Hong Kong-based partner of Swedish group East Capital, a $3.5bn (€3.1bn) fund management firm.
“The national team generally buys index heavyweights opportunistically when the market is tanking to shore up confidence.
PetroChina Co Ltd is one of its favourites: with a free-float of only 2.4% but a weighting of more than 6% of the Shanghai Composite Index, it can have an outsized impact on the nation’s biggest stock exchange.
Goldman Sachs strategists said “supportive capital” had flowed into big blue chips or defensive stocks such as banks, insurers, food companies and healthcare firms.
“We watch what the large Chinese brokers are doing everyday and follow them blindly as that can be quite profitable in these illiquid markets,” said the head of an equity derivative trading desk at a European bank in Hong Kong.
The China national team has pumped some 800bn to 900bn yuan (€112.6bn to €126.6bn) into stocks, according to Goldman Sachs.
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