Rising global inflation threatens to derail Asian economic recoveries. Image: AFP

China’s stock market regulator has called on institutional investors including the national social security fund to increase their holdings in local A-shares, which have declined significantly this year for a plethora of reasons.

With lockdown measures in key cities including Shanghai and Guangzhou crimping the economy, foreign investors reportedly pulled out 4.5 billion yuan (US$692 million) from mainland shares last month and have offloaded another 5.6 billion yuan so far in April.

The market value of Chinese equities has declined by US$2.7 trillion so far this year, Bloomberg reported.

Some international investors are known to have reduced their Chinese holdings soon after Russian troops invaded Ukraine on February 24 due to concerns that China could face secondary sanctions from the West as a firmly committed Russian ally.

On Thursday, US Deputy Secretary of State Wendy Sherman warned China it could be hit with sanctions if it offers “material support” to Russia’s war in Ukraine. Sherman said she hoped Beijing would learn the “right lessons” from Russia’s war, including that it can’t separate the US from its allies.

“They have seen what we have done in terms of sanctions, export controls, designations, vis-a-vis Russia, so it should give them some idea of the menu from which we could choose if indeed China were to provide material support,” Sherman said at a Brussels event hosted by Friends of Europe, which is co-funded by the European Union (EU).

Those threats have China looking for alternative sources of investment in its stock markets.

To be sure, the China Securities Regulatory Commission (CSRC) has long-encouraged long-term funds to boost their investments in the country’s bourses. After the then-CSRC chairman Guo Shuqing took office in 2011, he said the CSRC would encourage China’s pension and housing provident funds to invest in the securities markets.

From time to time, Guo and his successor Yi Huiman reiterated such a policy direction at many events, especially when A-share markets were under pressure.

China is calling for more local investment in local bourses. Photo: AFP

The Shanghai Composite Index, the benchmark of the A-share markets in Shanghai, has declined by 15% so far this year, closing at 3,086 on Friday (April 22). The CSI 300 Index, which tracks 300 stocks listed in Shanghai and Shenzhen, has also slipped 18.8% this year, closing at 4,013 on Friday. Both indexes are sinking toward their lowest levels since June 2020.

Downward pressure on China’s A-shares increased in early March due to many reasons, including Russia’s war in Ukraine, China’s spiraling Covid outbreaks and the possible delisting of many US-listed Chinese firms, analysts said. China’s tightening regulations on the platform economy has also driven down the shares of Chinese technology giants since late 2020, they said.

In three events between January 28 and February 22, CSRC’s Yi called for more long-term funds to buy stocks and help stabilize A-share markets. On Thursday evening, Yi held a closed-door panel discussion with the heads of major banks, insurers and the Social Security Fund, urging them to invest more in equities to help tame short-term market fluctuations.

“Currently, the global economic recovery is slowing down, the impact of geopolitical tensions is growing while China’s domestic economy is facing a ‘three-fold pressure’ caused by a contraction in demand, a supply shock and weakening expectations,” Yi told the meeting, according to a CSRC statement. “Risks in economic and financial areas have increased and created many uncertainties and difficulties.”

The term “three-fold pressure” was first mentioned by Chinese officials in the Central Economic Work Conference held on December 8-10 last year.

Dong Dengxin, director of the Finance and Securities Institute of the Wuhan University of Science and Technology, told mainland media in a previous interview that Chinese pension funds had bought a total of 4.18 trillion yuan of Chinese stocks but that such investment represented less than 5% of the market cap of the A-share markets.

Dong said Organization for Economic Cooperation and Development (OECD) countries on average had 24.4% of their stocks held by pension funds.

Separately, China published a consultation paper on the development of a new national pension scheme on April 21. Analysts estimated the size of the new scheme, contributed solely by individual investors, would reach 1 trillion yuan over the long term and help fuel additional inflows into domestic equities.

Meanwhile, Simon Edelsten of UK-based investment firm Artemis Investment Management LLP told Bloomberg in an interview that his team sold all its China investments last year as the Chinese government tightened its regulations on internet firms including Ant Group and Didi Global.

The DiDi logo on a phone screen with a stock chart in the background. Photo: AFP / Jakub Porzycki / NurPhoto

Edelsten added that the scale and speed of sanctions imposed on Russia had also forced a rethink of Western attitudes towards China.

Brendan Ahern, chief investment officer at Krane Funds Advisors LLC, also said that Western sanctions on Russia raised concerns that China could be next.

On Thursday (April 21), the US Securities and Exchange Commission (SEC) announced the addition of 17 Chinese firms, including Luckin Coffee and Li Auto, on its list of companies that would be delisted if they could not fulfill its accounting requirements.

The SEC announcement added heavy downward pressure on Hong Kong stock markets, causing the Hang Seng Index to fall by about 500 points on Friday morning. The index closed down 43 points, or 0.21%, at 20,638 in the afternoon.

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