1 Song Tao heads the Taiwan Affairs Office
Chinese market fluctuations
Feb. 2
Chinese shares fell across the board, adding to the previous week’s rout. Mainland media reported that more than 5,100 stocks in the Shanghai, Shenzhen, and Beijing indexes saw declines, with over 1,000 stocks falling by more than 8 percent.
- The Shanghai Composite Index fell 2.56 percent to 2699.88 points at the close, a new low since April 2020. During inter-day trading, the index fell as low as 2,677.55 points.
- The Shenzhen Component Index fell 3.55 percent to 7,947.99 points.
- The ChiNext Index fell 3.47 percent to 1,533.85 points.
- The STAR 50 Index fell 3.57 percent to 665.41 points.
Feb. 5
Chinese shares continued to fall to new lows during the day’s trading session. Mainland media reported that 4,979 stocks saw declines at the close, with over 5,000 stocks falling during inter-day trading. Also, trading was suspended for 1,368 stocks after they hit the lower limit.
- The Shanghai index fell 3.48 percent to 2,636.09 points during inter-day trading, the lowest since January 2019. The index closed down 1.02 percent to 2,702.19 points.
- The Shenzhen index fell 4.62 percent to 7683.63 during inter-day trading, the lowest since February 2019. The index closed down 1.13 percent to 7,964.71 points.
- The ChiNext index fell 4.45 percent to 1482.99 points. However, the index closed up 0.79 percent to 1,562.61 points.
Feb. 6
Chinese stocks rallied with 3,829 shares seeing gains and more than 500 stocks making gains of over 9 percent.
- The Shanghai index went up 3.23 percent to close at 2,789.49 points.
- The Shenzhen index went up 6.22 percent to close at 8,460.38 points.
- The ChiNext index went up 6.71 percent to close at 1,667.45 points.
- The CSI 1000 index went up 6.97 percent to close at 4,592.44 points. The index was up a record 8.1 percent at the peak during inter-day trading.
Bloomberg News wrote that the stock rebound followed its report that PRC regulators were planning to brief Xi Jinping on the market.
Feb. 7
Chinese stocks continued to rebound, with the trading volume exceeding 1 trillion yuan. However, nearly 3,000 shares (57 percent of trading volume) saw declines, with over 300 small and micro-cap stocks hitting the limit down.
- The Shanghai index rose 1.44 percent to close at 2,829.70 points. The index is down 4.88 percent for the year.
- The Shenzhen index rose 2.93 percent to close at 8,708.24 points. The index is down 8.57 percent for the year.
- The ChiNext Index rose 2.37 percent to close at 1,707.02 points. The index is down 9.75 percent for the year.
Regulator pledges market support
Feb. 4
Yi Huiman, the Party secretary and chairman of the China Securities Regulatory Commission, announced the deployment of several measures to maintain market stability during a meeting of the regulator’s Party Committee.
The meeting proposed:
- Strictly control the listing of companies, intensify delisting efforts, and vigorously improve the quality of listed companies.
- Thoroughly investigate illegal activities and strictly crack down on major financial violations in accordance with the law, including market manipulation, malicious short selling, insider trading, and fraudulent issuance of securities.
- Encourage and support various types of investment institutions to increase the counter-cyclical layout, and guide the entry of more medium- to long-term funds into the market.
- Carefully listen to the voices of investors, respond promptly to investor concerns, and protect the legitimate rights and interests of investors.
On the same day, the CSRC issued an article (證監會依法從嚴打擊詐欺發行、財務造假等資訊揭露違法行為) on its website concerning the topic of strictly cracking down on illegal financial activities. The article stressed that perpetrators of fraud will face severe consequences including being “ruined and imprisoned for life” (傾家蕩產、牢底坐穿).
Feb. 5
The CSRC published an article on its website on severely punishing financial manipulation to undermine stable market operations (严惩操纵市场恶意做空 切实维护市场稳定运行).
The article said that “some unscrupulous individuals” had illegally profited from the recent stock market fluctuations at the expense of investors’ “legitimate rights and interests.” The article added that the CSRC will intensify its supervision of trading activities, use a myriad of means to gather intelligence on the markets, and collaborate with the Ministry of Public Security to identify cases of suspected malicious market manipulation and short selling.
The article gave three case examples of stock price manipulation and short selling, and warned that “[those who engage in] malicious market manipulation and short selling … have already stood on the opposite side of all shareholders.” The article added that the CSRC will maintain a “zero tolerance,” high-pressure stance to ensure that those who dare to maliciously manipulate the markets and carry out short selling will “lose their entire family fortune and sit in jail until the end of their days.”
Feb. 6
A CRSC spokesman announced three further measures that the PRC authorities plan to use to enhance supervision over securities lending when asked about the subject by a reporter at a press conference:
- Implement a temporary halt on the expansion of securities lending and gradually wind down existing positions.
- Enforce stringent measures to prevent securities firms from extending securities lending services to investors engaged in day-trading maneuvers.
- The CSRC will combat illicit activities perpetrated through securities lending transactions such as improper arbitrage.
Trading restrictions tightened
Feb. 5
1. Bloomberg reported that PRC regulators were tightening trading restrictions on domestic institutional investors and some offshore units in a bid to curb a worsening stock rout, citing people familiar with the matter.
The people said that PRC officials imposed caps on some brokerages’ cross-border total return swaps with clients, which limits a channel that investors based in China can use to short Hong Kong stocks. Also, some Chinese brokers that use the channel to buy mainland shares for their offshore units were told not to reduce their positions.
The authorities also completely banned some quantitative hedge funds from placing sell orders with effect from Feb. 5 and others were barred from reducing stock positions in their leveraged market-neutral funds. The people told Bloomberg that the bets, known as a Direct Market Access (DMA) strategy, are believed to have amplified the recent selloff in small-cap stocks.
According to mainland media, the scale of DMA is potentially in the 100 billion yuan range.
2. Reuters reported that the state-owned China International Capital Corp and other Chinese brokerages have restricted the amount of cross-border swap transactions that domestic investors can undertake, citing six sources familiar with the matter.
Domestic CICC clients cannot add new positions via total return swaps (to make overseas investments) since Jan. 5 as the broker strives to limit its derivatives book, according to three sources. At least three other major Chinese state brokerages are following a similar approach, three sources said.
Top regulator replaced
Feb. 7
State mouthpiece Xinhua reported that Wu Qing had been appointed to replace Yi Huiman as chairman and Party secretary of the CSRC.
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Wu Qing, 58, had worked in the CSRC in his formative years. When Wu was director of the securities company risk disposal office at the regulator from 2005 to 2009, he oversaw the disposal of 31 non-compliant securities firms.
Wu was later transferred to Shanghai where he served in various government positions before being appointed deputy Party secretary of the municipality. Wu also ran the Shanghai Stock Exchange between 2016 and 2017.
US embassy post turned into ‘wailing wall’ for Chinese stock plunge
Feb. 2
Large numbers of anxious Chinese investors vented their frustration with the plunging stock markets and the declining economy on a Weibo post by the U.S. embassy on protecting wild giraffes. The investors urged the U.S. to help rescue the Chinese stock markets, allow them to invest instead in the U.S. markets, or even facilitate their migration to America. One user even asked the U.S. embassy in China to “spare us some missiles to bomb away the Shanghai Stock Exchange” while another wrote that the embassy “has become the Wailing Wall of Chinese retail equity investors.”
The CCP authorities appeared to step in to delete comments under the U.S. embassy’s post on Feb. 5. However, the post still received 170,000 comments, 741,000 “likes,” and 19,000 reposts as of Feb. 6, Beijing time, with the bulk of the comments being unrelated to the post’s topic of wildlife conservation.
Chinese investors also took to the Weibo page of the Indian embassy in China to air their grievances. Aside from complaining about the Chinese stock markets, the investors also praised the Indian markets for surging over the past two decades and apologized for having previously made discriminatory remarks about India and Indians.
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When the Chinese stock markets plummeted near the end of January, some Chinese netizens latched on to rumors from abroad that Xi Jinping could be suffering from pancreatic cancer to make snide jokes, including writing that only “bad news” (euphemism for the death of Xi) can save the markets and that the Chinese economy will survive if “this person dies.”
Hu Xijin regrets dipping into the markets
Feb. 5
Hu Xijin, the former editor-in-chief of the Global Times, told mainland media that he had lost about 78,000 yuan since going public in a high-profile manner about investing in Chinese stocks. Hu said that he would never invest in the stocks if he could turn back time and lamented, “Old Hu still has poor foresight.”
Previously, Hu made bullish statements like “it’s gold everywhere below 2,800 points” and poured an additional 120,000 yuan into A-shares when the Shanghai index dipped below 2,800 points. Hu also said, “As for what exactly below 2,800 signifies, I believe time will be the judge.”
Investors fear China is ‘uninvestable’
Feb. 2
The Financial Times reported that over 40 percent of investors surveyed at a Goldman Sachs conference in Hong Kong on Chinese equities believe that China was “uninvestable.”
The Times added that it was told by traders, asset managers, and hedge funds that global investor confidence in China had been shaken by three years of grinding losses and rallies that quickly fizzled out. The Times wrote that “aversion to China stocks among global investors has become more entrenched over the past 12 months thanks to lackluster economic growth, an unresolved property sector crisis, underwhelming government support for markets and fraying diplomatic relations between Beijing and Washington.”
The Times noted that the benchmark MSCI China stock index was down (at the time of publication) by more than 60 percent from its peak in early 2021, or a loss of more than $1.9 trillion in market capitalization over that period.
‘Disappeared’ financial executives officially step down
Feb. 2
Bao Fan, a prominent Chinese banker who was “disappeared” by the authorities last year, resigned as chairman and chief executive officer from his financial firm China Renaissance Holdings Ltd. according to an exchange filing. The company said that Bao had stepped down “for health reasons and to spend more time on his family affairs.”
The CCP authorities appeared to have “disappeared” Bao in February 2023. He was later officially placed under detention and was still “cooperating” with the probe as of August 2023.
Bao, who was also a former banker at Credit Suisse and Morgan Stanley, founded China Renaissance in 2005 and helped the company rise to prominence by brokering mergers that led to the formation of the ride-hailing service Didi Global Inc. and food-delivery company Meituan. Bloomberg previously reported that Bao’s detention is likely related to China Renaissance’s former president Cong Lin, who was arrested in September 2022.
2. Mainland media reported that prominent Chinese fund manager Wang Yawei had been “out of contact” for several days and his company Qianhe Capital is being managed by his wife. Mainland media added that Wang is “assisting in investigations” and the bulk of his fund products are facing liquidation, citing industry insiders.
On Feb. 3, Qianhe Capital released a statement saying that Wang had moved out of daily management of the company due to “personal reasons” and that the company will “maintain stability in the team and ensure its continuous stable operation.”
Qianhe Capital, which caters only to wealthy investors, is estimated to have 10 billion yuan worth of assets under management (30 billion at its peak) and has 51 fund products in operation. There is some speculation that Wang Yawei’s “disappearance” is linked to a corruption case involving China Asset Management.
Our take
1. The latest stock market fluctuations reflect growing pessimism about the Chinese economy, growth prospects, and strengthening authoritarianism in China under Xi Jinping, as well as international concerns about the PRC as a looming geopolitical threat.
Meanwhile, the CCP authorities are scrambling to boost investor confidence and prop up the markets through a mix of propaganda, policies, and capital support.
2. The CCP authorities have thus far tapped the “national team” to prop up the markets. Goldman Sachs estimated that the “national team” bought 70 billion yuan worth of Chinese shares over the past month. Meanwhile, Central Huijin Investment announced on Feb. 6 that it had bought more index-linked exchange-traded funds to maintain market stability without disclosing the amount involved. And in January, Bloomberg reported that the authorities were looking to mobilize about 2 trillion yuan for a stabilization fund, citing people familiar with the matter.
Yet the “national team’s” efforts may not be enough to stabilize the markets should downward fluctuations continue after the recent rally. According to a Goldman Sachs report, effective market stabilization could require at least 200 billion yuan, or close to 1 percent of the market float; the “national team” still has some ways to go before hitting the 200 billion yuan mark if Goldman Sach’s estimate of 70 billion yuan worth of shares being bought over the past month is accurate. Also, there is no tangible sign that the authorities are going ahead with the “2 trillion yuan stabilization fund”; barring further development on that front, the news could eventually turn out to be a “positive energy” propaganda leak to Western media for the purposes of shoring up investor confidence and preventing greater market routs.
The “national team” is also unlikely to have sufficient funds for stabilization work. For one, the state funds that comprise the “national team” and other financial institutions are responsible for underwriting government bonds, which presents a serious strain on their liquidity. Mainland media reports indicate that 384.45 billion yuan worth of local government bonds were issued in January 2024 alone. As of Jan. 31, 33 provinces and cities specifically designated in the state plan had disclosed plans of issuing local government bonds totaling 1.8 trillion yuan. With both the central and local governments looking to issue bonds on a scale on par with, if not exceeding, the figure in 2023 (about 24.2 trillion yuan worth of central government, local government, and local government financing vehicle bonds), government entities would be sucking up over 2 trillion yuan from the markets (including the stock markets) on average each month. Put another way, the “national team” could face a liquidity crunch when they are required to carry out “market stabilization” operations and still underwrite massive amounts of government bonds.
All in all, the “national team” has limited resources and therefore only finite means to prop up the stock markets. The funds that Beijing can deploy for market stabilization work are further constrained by its need to maintain currency stability, prevent defaults on local government debt, and ensure the basic functioning of local governments. Meanwhile, optimism over news that Beijing is perhaps readying a sizable “stabilization fund” should be tempered by the lack of concrete progress toward actualizing the fund.
3. The CCP authorities have attempted to restore confidence in the markets by releasing “positive” economic data and ramping up propaganda. Beijing has also sought to strengthen investor confidence by announcing more stringent financial supervision with “teeth and thorns” (including probing prominent financiers) and imposing restrictions to curb “malicious market manipulation.”
Beijing’s confidence boosters, however, would likely have no substantial impact or could be counterproductive. For instance, China’s official economic figures for 2023 are so dubious that they appear to have inspired the massive selloffs in January and likely continue to be a factor influencing the current market fluctuations. Also, the increased effort to target the financial sector and system with the anti-corruption campaign could cause more investor panic and selling instead of calm and buying as fears of growing authoritarianism in China are stoked. The deepening of the anti-corruption campaign could expose the incredibly severe and intractable problems with the Chinese markets and financial sector (which were made worse and entrenched over decades of CCP misrule) and leave investors feeling even more pessimistic and inclined to exit their positions. Finally, the intensification of financial and economic propaganda could trigger more selloffs as investors read between the lines and observe that the CCP is often struggling mightily to resolve the things that it heavily emphasizes in propaganda.
Meanwhile, foreign investors are increasingly losing faith in China, its markets, and its economic prospects as they account for Xi Jinping’s strengthening authoritarianism, the PRC’s increased emphasis on ideology and national security, and the growing geopolitical risks of investing in China as the PRC continues to be friendly with countries opposed to the Western-led global order like Russia and Iran, as well as the CCP’s unwillingness to relinquish its claim over Taiwan.
4. There are several possible reasons why Wu Qing has replaced Yi Huiman as head of the CSRC at this time.
Beijing could be looking to signal to the markets that change is coming by appointing a new person at the helm of the securities regulator as part of a broader bid to restore investor confidence.
Beijing could also be looking to Wu to enforce stricter supervision as it looks to clamp down on “malicious market manipulation.”
The replacement of Yi gives the impression that he is being scapegoated and partly made to shoulder the blame for the market fluctuations. However, Yi could simply be headed for a planned retirement; he is already 59 and was not appointed a member of the 20th Central Committee at the Party Congress in 2022. In contrast, the younger Wu is an alternate member of the 20th Central Committee and appears to be on his way up.
5. The Xi leadership’s economic policymaking hesitancy suggests that it currently has no good options for rescuing the markets and the economy, and cannot decide on how to go about extricating the regime from the quagmire.
The clearest sign that Beijing is struggling to come up with concrete plans for economic rescue and reform is the lack of announcement and information about when or whether a third plenary session of the 20th Party Congress will be held. The Xi leadership’s silence on the issue is troubling investors and observers because economic reform was typically the theme of previous Third Plenums.
Beijing’s continued silence on the Third Plenum and inability to produce tangible economic rescue policies will further undermine investor confidence, prompt more market plunges, and make it even tougher for the “national team” to stabilize the markets.
6. Xi Jinping and the CCP face heightened political risks should the markets maintain a trajectory of downward fluctuation and the Chinese people increasingly become dissatisfied with those in charge. The U.S. embassy “wailing wall” incident and people wishing for Xi’s death hint at growing public discontent with the powers in charge and coming social destabilization. Compounding socio-economic pressures will likely transform into political problems for Xi and the CCP.
