China's Increased Stock Purchases by Government May Spur Year-End Equity Rally, Says Goldman Sachs

The Chinese government's increased involvement in purchasing domestic stocks has caught the attention of Goldman Sachs, prompting the investment bank to predict a resurgence in China's equities by year-end. This renewed engagement is seen as part of the government's strategy to stimulate economic growth and enhance policy easing momentum, often referred to locally as the "National Team" buying.

Goldman Sachs arrived at this conclusion by analyzing several key indicators. These include studying the trading patterns of key holdings by state-linked entities, tracking inflows into selected index-based exchange-traded funds (ETFs), and monitoring insider buying of shares in state-owned enterprises. Notably, the top five ETFs favored by the National Team saw a significant net subscription increase in August.

Despite a series of measures aimed at spurring economic growth and supporting equities, such as relaxing property purchase restrictions and reducing stock transaction stamp duty, Chinese stocks have largely remained stagnant. Foreign investors, in particular, have been selling Chinese stocks for two consecutive months, and the CSI 300 Index, tracking yuan-traded stocks, has declined by approximately 6% over the year.

It's important to highlight that although state intervention in stocks may not be a foolproof tool to prevent market declines, the preference for equity allocation in China remains focused on onshore stocks. This preference is driven by the lower sensitivity of onshore stocks to geopolitical tensions and overseas liquidity flows, as well as their better alignment with sectors that benefit from policy tailwinds.

Moreover, Goldman Sachs' analysis suggests that Chinese equities have responded positively in previous instances when Central Huijin, a government-affiliated entity, increased its stakes in China's four major banks since 2008. This historical trend has resulted in a median 4% increase in the CSI 300 Index over the subsequent three months.

In summary, Goldman Sachs sees the Chinese government's intervention in equities as a promising step toward stabilizing asset prices, restoring investor confidence, and reducing systemic risks in asset valuations. This intervention may pave the way for a recovery in the Chinese stock market. The "National Team" is estimated to hold onshore stocks equivalent to 3.5% of the total market capitalization, which amounts to about 2 trillion yuan.

By fLEXI tEAM