In the wake of Monday’s plunge on the Chinese stock market, many people are blaming the China Securities Finance Corp. (CSF), an obscure, quasi-government agency that provides funds to brokers

But is the CSF the villain for the rout, or a hero come to save the Chinese equities market?  Chinese news site Caixin takes an interesting look at the four-year-old agency that brokers had mostly ignored in favor of bank loans.

Founded by China’s major commodities and securities exchanges, the CSF functioned as a central bank for the securities industry. Its original responsibilities included financing margin trading and short-selling through brokerage firms.

While it’s impossible to know exactly how much money the CSF used as part of the Chinese government’s effort to stop the market sell-off this summer, many people believe it bought more than one trillion yuan worth of shares.

Many analysts said the CSF went too far, but others said the agency stabilized the mainland A-share markets and prevented investors from losing even more than the 15-trillion-yuan decrease in stock valuations.

Caixin pointedly asks if the “CSF, by opaquely intervening in the stock market on behalf of the government and then keeping most of its stock-trading activity secret, is playing the spoiler for long-pursued stock market reforms.”

The general manager of a private equity fund, who asked not to be named, told Caixin that the root cause of the crisis wasn’t leverage but a “severely outdated regulatory system. … At the core of the crisis are reform delays, a lack of internationalization and a lack of understanding about how the market works.”

In an effort to assure investors that it doesn’t plan to soon sell its recent purchases, a CSF executive told state media outlet Shanghai Securities News on July 22 that the agency had not sold any of the stocks it bought, Caixin reported.

Much of the CSF trading is done in secret and CSF officials have said that any publicity would undermine its efforts to stabilize the market by letting investors know which companies are getting what amount of government support. With 5% ownership the threshold for public disclosures by shareholders, few expect the CSF to break the 5% barrier. However, many blue-chip companies have released data showing that the CSF holds nearly 5% of their shares.

While the CSF wants to move under the radar, Caixin reports that as of July 23 at least four companies announced that the CSF was one of its five largest shareholders.

The big issue is how this changes the market’s dynamics. Instead of focusing on the economy, earnings and the fundamentals of a listed business, investors are instead trying to gauge what the government, and the CSF, in particular, is going to do next.

Investment decisions based on business fundamentals and a company’s health apparently are no longer possible in China because “now everyone is trying instead to figure out and predict what government policies will be like and how retail investors will respond,” a broker who requested anonymity told Caixin.

Monday’s rout came about not because the CSF sold any shares, but because it returned ahead of schedule funds it had borrowed from commercial banks to stabilize the stock market. The idea that the government may no longer be propping up the market sent the Shanghai Stock Exchange Composite Index down 8.5%. On Tuesday, the Shanghai Composite lost 1.7% to 3,663.

If just the idea that CSF may not buy any more shares sends the market down 8.5%, what happens when it actually sells some shares?

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