In a Chinese stock market obsessed with round numbers, 3,500 has emerged as the latest make-or-break level for traders trying to gauge the staying power of state support.
Signs of government buying have appeared at that price on the Shanghai Composite Index at least four times over the past six weeks. The latest example came on Wednesday, when the gauge posted an intraday rally of 6.6 percent after falling to as low as 3,558.38.
Speculation around the government’s intentions has escalated since Friday, after China’s securities regulator signaled authorities will pare back an unprecedented campaign to prop up share prices as volatility falls. While policy makers have a long history of defending key levels on the Shanghai Composite, their role in supporting the market has taken on even greater importance as China’s wealthiest traders join an exodus of foreign investors in the wake of a $4 trillion crash.
“All eyes are focused on whether the government will shore up the 3,500 level,” said Nelson Yan, chief investment officer at the Hong Kong unit of Changjiang Securities Co. “Any inaction could trigger a new round of selling.”.
The government has armed a state agency with more than $400 billion to bolster share prices and told state-owned companies to buy stocks. It’s seeking to prop up the market after a drop of more than 30 percent in the Shanghai Composite threatened to undermine confidence in President Xi Jinping’s ability to manage the economy.
The benchmark gauge fell as much as 8.2 percent to 3,421.53 on July 8, before paring losses to close above 3,500. The following day, the gauge surged 10 percent off its intraday low of 3,373.54. On July 28, the measure rebounded more than 6 percent after touching 3,537.56.
Evidence of government support at closely watched levels in China’s stock market stretch back to at least June 2005, when the Shanghai Composite briefly fell below 1,000. The regulator responded by urging funds to stabilize the market and allowing companies to buy back their shares.
Failure to defend such levels risks accelerating losses. Analysts at Macquarie Group Ltd. and Guosen Securities Co. speculated at the end of June that authorities would intervene to keep the index above 4,000. After the gauge closed below that level on July 2, shares tumbled a further 10 percent over the next four days.
The Shanghai Composite fell 1.3 percent at 1:24 p.m. local time, heading for its lowest close in two weeks.
Even as the state buys, investors with the most at stake are cashing out amid signs of a deepening economic gloom.
The number of traders with more than 10 million yuan ($1.6 million) of shares in their accounts shrank by 28 percent in July, while those with between 1 million yuan and 10 million yuan declined by 22 percent, according to data compiled by China Securities Depository and Clearing Corp. International investors have sold $7 billion of Shanghai shares through an exchange link with Hong Kong since July 3.
“More investors may be taking the opportunity of state buying to unload their holdings, as growth prospects for China are looking dimmer,” said Bernard Aw, a Singapore-based strategist at IG Asia Pte Ltd.
A weaker yuan is also reducing the attractiveness of Chinese assets. The currency plunged the most in 21 years last week after the central bank unexpectedly devalued it.
China Securities Finance Corp., the state agency tasked with supporting share prices, will remain in the stock market for years to come, the China Securities Regulatory Commission said, although the agency will no longer add to holdings unless there’s unusual volatility and systemic risk. The fund transferred some shares to Central Huijin Investment Ltd., a unit of the nation’s sovereign wealth fund, the CSRC said.
Even if state-backed buyers hold the line at 3,500, the Shanghai Composite may struggle to surpass 4,500 — a target Chinese brokerages cited when they unveiled a market support fund on July 4. The gauge plunged 11 percent in three days after it closed at 4,123.93 on July 23.
Clear levels of state support are “great for canny traders,” said Michael Every, head of financial markets research at Rabobank Group in Hong Kong. “Buy on the way up as government bids higher — then sell at the level they have flagged as a target. Rinse and repeat. The government carries the can.”