A little over a year ago China’s domestic stock markets were in a death-spiral free-fall; and then the government set about restoring calm. Part of a package of measures was a stock purchase program using the agents of the China Securities Finance Corporation and Central Huijin.
Not long after the intervention, because so much of the action affected companies that have to report changes in balance sheets on one side of the trade and changes in major shareholder holdings on the other side the scale of the intervention became clear.
Yi Huang, Jianjun Miao and Pengfei Wang of the Graduate Institute (Geneva), Boston University and the Hong Kong University of Science and Technology respectively have not only done excellent forensic work on the activity but have gone a step further and tried to address the question ‘did it really work’? If an intervention is to be judged a success it must not only halt a downdraft (which it did) but it must also add value to the market in the process. So, did it do that as well?
The researchers say it did. More precisely they claim between Rmb5, 697bn and Rmb6, 635bn of value was added from mid June 2015 to September 2016 and if that sounds like a big number it is; it’s around 10% of China’s 2014 GDP.
Value was added in three ways. First, the firm value (equity + debt) rose in large part because companies bought by the government saw the value of their debt rise. Second, it reduced default probability and associated price discounts in companies bought and finally it increased target company’s liquidity.
Day one the government began buying in nearly 1,000 names and by the end of their program had intervened in 1,365 stocks (about half the market) so the researchers had a rich data set to mine. Their work made easier being able to compare the change in so many companies affected with so many industry peers left out of the process.
One of the really interesting observations is the common characteristics of companies the government were buying. They tended to be those with higher ROAs and higher dividend ratios with lower price to book values. There seems therefore to have been a degree of method in what at the time many judged madness. The government were not acting then as punters but old school value investors despite the crisis. Kudos.
The paper ends without addressing the-elephant-in-the-room as that wasn’t its purpose. What investors would like to know now is the long-term plan for the government’s inventory? A-shares are likely to remain becalmed a while longer until that question is resolved
The paper in full can accessed via the following link Saving China’s Stock Market
Happy Sunday.