China’s ‘National Team’ may be mobilising to stabilise its crumbling equity markets

• Mainland Chinese equity indices are at or nearing pre-pandemic lows
• An abrupt bout of ETF buying late Thursday has raised suspicion of state-backed involvement to stabilise market weakness
• Sperate reports suggest the nation’s largest broker has banned short-selling by some clients
• China’s A50 index surged late Thursday and has gone on with the move on Friday

China’s ‘National Team’ – a collection of state or quasi state-backed entities tasked by the Chinese government to smooth out financial market ructions when the prevailing price action is deemed desirable – looks like it may have been mobilised with China’s A50 ripping higher late Thursday and going on with the move today. Combined with depressed valuations, extreme pessimism and markedly improved setups on the charts, grounds for a near-term bounce appear to be growing.

National Team mobilised again?

With mainland Chinese equity indices either at or nearing post-pandemic lows after suffering a nasty plunge earlier this week on news the nation’s population decline accelerated last year, adding to an already sluggish economy, another downbeat session suddenly sprung to life late Thursday with the A50 and other indices surging late in the session.

As someone who witnessed the bubbles and busts in Chinese equities in the 2000s and 2010s, and the government’s ill-fated attempts to prevent widespread selling on the way down, it immediately drew comparisons to episodes of National Team involvement in past. I speculated about its involvement on X, formerly known as Twitter, when the abrupt bid started. It seems my hunch may have been on the money.

According to reports from Bloomberg late Thursday, the value traded in several ETFs tracking China’s benchmark CSI 300 index surged to levels not seen in years during the session, fitting with a similar modus operandi to known buying from state-backed entities in the past.

Central Huijin Investment, a sovereign wealth fund, bought an undisclosed amount of ETFs in October 2023, which you can circled on the A50 daily chart below, and vowed to keep increasing its holdings at the time. As such, the sudden spike in ETF volumes on Thursday suggests unofficial intervention may have taken place.

Signs of broadening state involvement

Adding to sense it may be part of a broader swathe of measures to stabilise mainland markets, there a sperate reports today suggesting CITIC Securities, China’s largest broker, has suspended short selling for some clients in mainland markets, according to people familiar with the matter who spoke with Bloomberg.

While National Team involvement rarely succeeds in reversing prevailing trends over the longer-term, its involvement can lead to short-term market squeezes that are often violent in their speed. While there’s no guarantee the same will occur on this occasion, it’s safe to say pessimism towards Chinese is quite low right now.

China A50 may be nearing a near-term bottom

Looking at China’s A50, it’s been nothing by lower highs and lower lows for much of the past six months. But the bullish candle printed on Thursday on the back of suspected National Team involvement, seeing the index bounce off both horizontal and downtrend support, suggests we may have put in a near-term bottom. Similar price action was seen back in October, again stemming from state involvement, which led to a modest bounce.

Adding to the case for more pronounced move, there has been bullish divergence between RSI and price since mid-December, with the former logging higher lows while the latter has printed lower lows. Near-term, the A50 really needs to clear resistance at 11125, a level it either probed of looked on five consecutive sessions earlier this month without ever being able to break through it. If it does manage to gain a foothold and close above it, the 50-day moving average at 11442 and 2020 low of 11570 would be the logical initial upside targets.

For those looking to establish longs on a clear break and hold above 11125, a stop-loss could be placed below for protection. For those without the patience, support is located too far below for protection unless you have a substantially higher upside target. As such, if you go long prior to any potential break, make sure your stop level is one that has favorable potential returns for the risk you’re taking.

-- Written by David Scutt

Follow David on Twitter @scutty