Should PBoC directly buy A-shares to support the market?

January 11, 2019 10:38
History shows that unorthodox government support for equity markets can easily backfire in China as such moves tend to encourage hordes of speculators. Photo: Reuters

Shanghai and Shenzhen bourses slumped 25 percent and 34 percent respectively last year. Amid the equities slide, some brokerage houses and media have been suggesting that the People’s Bank of China (PBoC) should consider buying A-shares directly to help shore up the markets. The question is: will that happen?

In a commentary published on a state media website on Tuesday, Zhang Anyuan, chief economist at Dongxing Securities, wrote: "Many central banks hold large amount of foreign equities, as part of their strategy to diversify foreign exchange reserves. It’s not improper for the Chinese central bank to hold domestic equities to help stabilize the market.” 

He suggested that the PBoC can hold 1.58 trillion yuan to 1.78 trillion yuan of domestic equities, if it took reference from the Bank of Japan (BoJ). That amount won’t have any structural impact on the central bank’s balance sheet. The PBoC now has total assets of 36 trillion yuan, and China’s A-share market is worth around 48 trillion yuan.

The so-called National Team of government funds, which includes China Securities Finance Co, Central Huijin Investment, and the national social security fund, had bailed out the domestic stock market from time to time.

Zhang stressed that the central bank can provide even more stable capital source and better transparency, which could go a long way to shore up market confidence and help A-shares stabilize in the critical year of 2019.

Such suggestions were quickly echoed by CITIC Securities and Nomura.

CITIC Securities analysts noted that it’s feasible for PBoC to buy A-share ETFs through expansion of its balance sheet.

PBoC has not directly responded to the suggestions. Yet, Sheng Songcheng, former director of the central bank's Survey and Statistics Department, wrote on Wednesday that there could be regulatory issues and questions over the independence of monetary policy if PBoC starts buying equities. However, he did admit that the existing law does not prohibit the central bank from such activity.

Globally, it is rare for central banks to directly buy domestic equities. There are only two actual cases.

The BoJ started to buy domestic stock ETFs since 2002, as part of the monetary easing measures. Now the Japanese central bank holds around 4.4 percent of its total assets in domestic stocks, and its holdings represent 3.7 percent of Japan’s overall stock market value.

It remains unclear how the move has stabilized the financial market and boosted economic growth. Some critics argued that the purchases distorted the stock market pricing signal and actually undermined the economy.

In another case, during the peak of of 1998 Asia Financial Crisis, the Hong Kong Monetary Authority (HKMA) used foreign exchange reserves to buy Hong Kong stocks as it tried to fight massive shorting by speculators.

The HKMA packaged its stock holdings into the Hong Kong Tracker Fund (02800.HK) the following year and exited from the market.

In the US, former Federal Reserve chairman Ben Bernanke had suggested equity purchases by the central bank to avert systematic risk during the 2008 financial crisis. But that idea was never put into action.

The way I see it, there is no sign that China has a systematic crisis at the moment despite steep falls in the domestic stock market. Therefore, it's not necessary for the PBoC to use unorthodox measures to support the market.

History shows that government support can easily backfire as such moves tend to attract hordes of speculators into the market and push stocks to unreasonable levels and set the stage for subsequent collapse.

This article appeared in the Hong Kong Economic Journal on Jan 9

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist