Money For Lunch – China’s Stock Market: All About the Mysterious King

China’s Stock Market: All About the Mysterious King

May 27, 2016 8:39 AM0 commentsViews: 129

Your perception of what a king is would no doubt be summarised as someone who rules over others, but in China’s financial circles, The King is the term used to describe what is a state-run investing behemoth, with a level of power that allows it to wield its power over the second largest stock market in the world.

If you want detailed financial information and to see what effect this mysterious king is having over market movements, you can always view information at Money Morning for the detailed facts.

Although the tactics utilized by the king is somewhat shrouded in a certain amount of mystery, it is certainly fascinating to see what China Securities Finance Corp (which is the official name for the financial powerhouse that is widely known as The King) actually does and how it influences financial markets.

Shareholder disclosures provide some useful clues

Information is not as readily available in China and therefore it is not always that easy to put all the pieces together and get a clear picture of what someone like China Securities Corp is doing and what it is buying.

As a result of mandatory shareholder disclosures that are contained within the annual reports of large numbers of Chinese companies, it is now possible to see what China Securities Finance Corp are buying and what holdings they have.

King by name and King by nature, would be the view when you see the details in front of you, with the agency owning the lion’s share or being amongst the top ten shareholders by volume, of virtually every one of China’s biggest companies.

China Securities is a prominent shareholder in over 600 companies and what this data also reveals, is that there appears to be a clearly defined strategy driving the shareholding activity.

Yielding power to influence the stock market

It is surely not a coincidence that the state-run agency demonstrates a clear preference for banks, state-owned enterprises and consumer firms, all of which tend to dominate the benchmark indexes.

The fact that China Securities virtually entirely shuns small-cap stocks which are less likely to exert any market impact, would strongly suggest that there is a clearly defined strategy to target stocks that can make a difference.

You are not going to get any official positive confirmation that this is the intention of course, but traders familiar with how the stock market in China operates, are mainly convinced that there is a government strategy to use the king’s firepower to yield some financial influence.

Following the clues

It is probably not surprising given the legendary status and perceived firepower that has resulted in China Securities being widely referred to as The King, that local investors are keen to follow in their footsteps and follow the buying clues they leave behind.

What you will also find is that traders with a bearish outlook, will try to obtain an inside track on what the agency is buying, so that they can avoid the prospect of betting against them in the markets.

The reason for this approach is clear. As The King is considered to be the primary tool utilised by the state in order to support share prices and restore confidence, especially after the shockwaves that reverberated around the world when China’s markets crashed by an eye-watering $5 trillion in the summer of 2015.

The fact that China Securities is the subject of such scrutiny by other investors is perfectly understandable, when you consider that their mission is seemingly not just to support the market but to also make a profit on their investments.

Worth following

To give you a further clue as to why investors are keen to mirror what The King is doing, consider the revelation that the agency’s top 100 holdings, which represent over 70% of their total disclosed holdings, manage to generate an average return on equity of 15%.

That impressive level of return is about double of what the rest of the overall market manages to produce, so if you can find out what China Securities is buying, they would appear to be worth following.

It is also worth saying that the agency has recently been transferring some of its shares to some other state-controlled entities. The primary purpose of the move is believed to be because they are repaying some loans, but it does at least explain why The King’s reported holdings have fallen to about 550 billion yuan.

One thing is clear, if you are trying get an insight into which shares might rise in China, knowing what the King is doing would be a big help. The problem might be accessing this information.

Laura Hammond has years of experience working in the finance sector. Now on a career break to spend time with her newborn daughter, she still likes to keep her ‘business brain’ sharp. Laura’s articles cover a range of investment and finance topics.

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