Chinese state-backed funds on Monday intervened to limit gains in the nation’s stock market, part of the Chinese government’s effort to restrain market swings before a key leadership reshuffle this month, according to people familiar with the matter.
The funds sold shares of large-cap companies, including banks and China United Network Communications Ltd (中國聯合網絡通信), said the people, who asked not to be identified because the information is private.
Before Monday, the funds had been buying stocks to support the market after S&P Global Ratings cut China’s sovereign credit grade, the people said.
Their share purchases on Sept. 22 and the following week included Unicom Global and other large-cap companies.
The moves to cap both gains and losses reflect Chinese leaders’ focus on stability in the run-up to a twice-a-decade Chinese Communist Party National Congress.
While the country’s stocks entered the global spotlight as they swung from boom to bust in 2015, government intervention has since helped reduce volatility in the US$7.7 trillion market to the lowest level since the early 1990s. State funds have been known to increase their presence during important political events.
After touching the highest intraday level since January last year on Monday, the Shanghai Composite Index erased half its gain by the close.
Industrial & Commercial Bank of China Ltd Industrial (ICBC, 中國工商銀行) pared its advance to 1.7 percent from 5.5 percent, while Unicom dropped the most in a week.
The China Securities Regulatory Commission did not respond to a request for comment.
The Shanghai Composite slipped 0.1 percent at 1:42pm yesterday.
News of state selling could help curb gains in large-cap Chinese stocks, KGI Securities (凱基證券) analyst Ken Chen (陳浩) said.
However, China’s big companies might remain a “major investment theme” if the country eases monetary policy, he added.
The stock market’s early rally on Monday was sparked by a central bank announcement that it would cut lenders’ reserve ratios from next year, a move that promises to support bank earnings and boost small businesses.
If history is any guide, the government is unlikely to allow a major equity rally any time soon.
After state-backed funds were said to sell bank shares in August last year, the Shanghai Composite slipped 1.8 percent.
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