Taking stock

Liu Yong: inspired fund’s name

“My vision ends in spring sorrow,” lamented the Song Dynasty poet Liu Yong. Yet it was his famous poem Phoenix Perching on a Parasol Tree that China’s foreign exchange reserves manager SAFE turned to for inspiration when it set up Wutongshu Investment (Parasol Tree) and its subsidiaries Fengshan and Kunteng Investments (Phoenix) at the end of 2014.

Over the past few months, Wutongshu has suddenly emerged as the new star player in China’s so-called “national team” – a group of state-backed financial institutions tasked with propping up the Chinese stock market since its rout last summer.

Spring sorrow is very much on investors’ minds. The key indices in Shanghai and Shenzhen are respectively down 19% and 21% so far this year. What would happen if the government started offloading its massive holdings in earnest as well?

The central authorities have never disclosed the official figure on the size of the government holdings. That’s why last week Wallstreetcn.com did its own calculation, publishing a detailed analysis of who owns what among the ‘national team,’ in tandem with research from Southwest Securities (SWS) and Industrial Securities.

SWS believes the three major state asset managers including Central Huijin owned a total of Rmb3.57 trillion ($547 billion) of stocks at the end of April, compared to Rmb1.6 trillion prior to last summer’s meltdown. The national team’s combined stakes in 1,300 listed firms would amount to 8.4% of the overall A-share market’s value.

Industrial Securities then provided detailed breakdowns for each star player. The government’s key scorer (or, perhaps, goalkeeper given their defensive role) has been China Securities Finance Corp (CSF), which was co-founded in 2011 by Shanghai and Shenzhen’s stock exchanges as the only provider of margin financing loans.

Industrial Securities says CSF and its 10 investment units owned 1,015 stocks with an equity value of Rmb1 trillion at the end of the third quarter of last year. During the fourth quarter, CSF reduced its holdings in 446 companies and no longer held top-10 shareholder positions in 201 of them. During the first quarter of 2016, it reduced its holdings in a further 93 companies and was no longer a top-10 shareholder in a further 32 companies.

The second big player Central Huijin Investment is a subsidiary of sovereign wealth fund CIC and holds the government’s stakes in the big four banks. Besides the banking shares, Industrial Securities says Huijin now owns 13 stocks with a market value of Rmb4.7 billion, while its asset management arm has 1,161 stocks with a market value of Rmb309 billion.

SAFE’s Wutongshu also suddenly popped into view when companies began releasing their annual reports and it showed up as a serial top-10 shareholder (seventh for Shanghai Pudong Development Bank, eighth for BoCom and ninth for Agricultural Bank of China, for example).

But as Chinese newspapers have subsequently revealed, most of its stakes came from CSF because it owed the central bank Rmb1.2 trillion for the liquidity it was provided with to prop up the market and has repaid it by transferring some of the stakes CSF purchased to Wutongshu.

As government-owned entities, neither Wutongshu nor Central Huijin are under any financial pressure to sell. If they followed the Hong Kong government’s pioneering example, they could establish an exchange-traded fund (ETF) to drip-feed their stakes back into the market (TraHK was set up in 1999 to handle the massive portfolio the government amassed in 1998 during its defence of the Hong Kong stock market against speculators during the Asian financial crisis).

Fortunately, it seems unlikely Wutongshu’s portfolio will suffer the same fate as the poet Liu Yong. He died destitute, although the courtesans who inspired his poems clubbed together to pay for his funeral.

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