One glance at Chinese bond and stock markets makes it clear that ‘The National Team’ needs help…
As China cracks down on the leverage in the shadow banking system (last night’s data shows a massive ongoing collapse in that credit source)…
And faces trade wars with US (occurring as China’s trade surplus hits a record high with US),
Chinese stock markets have tumbled…
And bond markets have collapsed as defaults surge…
And Yuan has plunged…
So what is to be done to rescue the perception that all is well in the land of Xi?
Simple – follow the same path as Japan and unleash the nation’s trillion-dollar sovereign wealth fund to buy domestic assets and save the world.
As Bloomberg reports, China’s $ 941 billion sovereign wealth fund (China Investment Corp – CIC) wants permission to invest in domestic stocks and bonds for the first time, people with knowledge of the matter said, as it tries to end restrictions on its mandate following government moves to open up financial markets.
Letting CIC invest at home would add a deep-pocketed buyer at a time when China’s equity and bond markets are under pressure from a trade war, a slowing economy and rising defaults.
At a public forum last month, CIC’s head of asset allocation Fan Hua said she saw “very good opportunities” in A shares and yuan-denominated bonds should the fund be allowed to invest.
The valuations of domestic shares are “very attractive” after recent declines as compared to other markets globally, Fan told a forum in Beijing on June 29.
CIC has been primarily restricted to investing overseas since it was set up in 2007 with money from China’s swelling foreign-exchange reserves. The fund is turning its eye on domestic securities as Chinese stocks have gained inclusion in MSCI Inc.’s indexes for the first time, widening their appeal to overseas investors.
How does this all end? Simple – not well.
Just this week, Japan’s giant GPIF reached its limit on how much domestic equity exposure it can take (so will need an allocation mandate change to keep the dream alive for Abe).
Japan’s Government Pension Investment Fund’s portfolio has exceeded its 25% allocation target for domestic stocks for the first time, a milestone that will force the world’s largest pension fund to retool its strategy for stable returns.
The fund that manages 156 trillion yen ($ 1.41 trillion) in assets typically balances its holdings among Japanese bonds, Japanese stocks, overseas bonds and overseas stocks.
According to a filing on Friday, Japanese equities accounted for 25.14% of the GPIF’s portfolio at the end of March. That equates to over 40 trillion yen worth of shares covering roughly 2,300 issues. The fund is believed to be a major shareholder in many companies listed in the Tokyo Stock Exchange’s first section.
The GPIF has earned the moniker as a “whale” in the equity market due to its outsize holdings of domestic stocks. Previously, a greater weight was given to less risky domestic bonds, which commanded a 62% share at the end of fiscal 2012.
And at the same time, The Bank of Japan now owns 80% of its ETF-purchase scheme’s eligible securities…
— jeroen blokland (@jsblokland) July 12, 2018
“Free market” reform anyone?