Scale of the state's shareholdings raises doubts about how strong the recent recovery really is

China's "national team" owns at least 6 per cent of the mainland stock market following the summer rescue to prop up prices, putting even more of the US$4.2 trillion bourses in state hands.

Government rescue funds were corralled into buying shares when the equity markets went into meltdown.

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The intervention succeeded in propping up prices -- the Shanghai Composite Index has since recovered by about 28 per cent from its late August low point.

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The two state financial institutions that led the stock market bailout in July and August increased their ownership of the Shanghai and Shenzhen exchanges from 4.6 per cent of total tradeable A-share market capitalisation at the end of June, to 5.6 per cent three months later, according to Wind, a financial database.

The figures are compiled from quarterly statements of listed companies, which are required to disclose their 10 largest shareholders.

The actual size of national team holdings is probably larger, given some likely hold stakes that are too small to rank among the top 10.

The Government cash infusion came after the Shanghai Composite Index fell more than 40 per cent from its seven-year high on June 12 through late August.

The estimate of the national team's shareholdings covers positions held by China Securities Finance Corp (CSF), the state-owned margin lender and main conduit for the injection of government funds.

The market value of CSF's holdings increased from only 692 million yuan ($165 million) at the end of June to 616 billion yuan three months later. It owned 742 different stocks, up from only two stocks three months earlier.

Also included are stakes held by Central Huijin Investment, the holding company for shares in state-owned financial institutions and a subsidiary of China's sovereign wealth fund. In spite of Huijin's additional share purchases in the third quarter, the market value of its holdings fell by 167 billion yuan in the period to 2 trillion yuan, mostly reflecting mark-to-market losses on shares it previously held.

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State shareholder

• China's Government owns at least 6 per cent of the country's stock markets.
• Markets are worth US$4.2 trillion.
• Rescue funds were corralled into buying shares when equity markets went into meltdown.
• Shanghai Composite Index has recovered by about 28 per cent from late August low point.

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The figures from Wind exclude share purchases by a group of 21 mostly state-owned securities brokerages, which in early July pledged to inject at least 120 billion yuan of their own funds to support the market. In late August, Bloomberg reported that the securities regulator asked them to add an additional 100 billion yuan to their holdings.

Goldman Sachs estimated in September that the Government had spent 1.5 trillion yuan to support the market in July and August.

In late August the securities regulator said that CSF and Huijin would halt large-scale purchases but maintain existing holdings indefinitely.

The large role of the national team in propping up the market raises doubts over whether the recent share rally is sustainable if the Government unwinds its holdings.

In late July, after a modest recovery, price drops resumed when Caijing, a financial news website, reported that the national team was working on exit plans.

The Caijing journalist who authored that report was later arrested and appeared on state television to apologise for stoking "panic and disorder".

The securities regulator this week rescinded a ban on stock sales by brokers' proprietary trading units, according to leaked documents published by local media.

The brokerage industry association said the group of 21 would not sell their holdings until the Shanghai Composite reached 4500. It was trading down 2.66 per cent yesterday at 3539.

Fundamentals also indicate that the recent rally may not be justified.

Earnings at Chinese A-share companies fell 16 per cent annually in the third quarter, including a 37 per cent drop for non-financial companies, the worst quarter since 2010, according to Credit Suisse.

- Financial Times