From BofAML:
Largely based on top-10 shareholder information disclosed by A-share companies, we estimate that the government likely spent at least Rmb1.5tr in Q3 to support the market (Table 1). Given the potential damage to the PBoC’s and RMB’s reputation, economic growth and long-term financial system stability, we think it unlikely that the government has the resolve to keep buying if heavy selling pressure in the A-share market resumes at certain point.
The prices paid so far
Excluding ETF positions, the government and affiliated funds bought shares in at least 1,365 A-share companies in 3Q, representing 49% of the total number of A-shares and roughly 7% of the A-share market’s free float. Of this, by number of stocks, 58% are listed on the Main Boards, 26% on SME and 16% on GEM (Table 2); by market value, close to 90% is on the Main Boards, 7% SME and 3% on GEM (Table 3); by market cap in value, about 60% are in stocks with Rmb50bn+ market cap (Table 4); by sectors in value, some 40% are in financials and 20% in industries (Table 5); by trailing 12-month PE, about 30% is at 40x+ or loss-making and 20% at is 20-40x (Table 6); by yield, about half is at 0-1% (Table 7). We estimate that the government’s position, including ETFs, incurred a Rmb220bn loss as of Sept 30, but the loss had turned into a small gain by Nov 11, after the recent market rebound (Table 1).
The unintended consequences
Leaving aside damage to its reform credentials, the government’s stock-buying program may negatively impact the economy and financial system: few central or commercial banks lend money to fund stock purchases, especially at this expensive valuation – this cannot be enhancing investor confidence in RMB; the related lending had contributed to an acceleration in M2 growth (13.5% YoY in Oct vs. 6.2% nominal GDP growth in 3Q); this excessive liquidity appears to be rushing into the tier-1 city housing market and the bond market.
Selling pressure likely to resume
This is because the A-share market is expensive and leverage in the market is still high.
Ex. banks, the A-share market is trading at 32.4x trailing 12-month earnings. On leverage, we estimate that approximately Rmb8.9tr market value, including all the government’s positions, is either partially funded by borrowing or pledged for lending (Table 8). This is equivalent to around 43% of the A-share market’s free float. Given the high financing cost of these positions and the expensive valuation, we suspect that it could be a matter of time before heavy selling resumes.
I guess not!
