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Latest buying has focused on specific sectors such as technology © Alex Plavevski/EPA-EFE/Shutterstock

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The past 12 months have been punishing for foreign exchange traded fund investors with exposure to China, but fresh signs of “national team” involvement might give risk-averse market participants pause for thought.

Z-Ben Advisors, a specialist research consultancy based in Shanghai, noted in a report released last month that institutional investors were continuing to increase their equity holdings via ETFs and that this activity was extending beyond the historical core China national team players.

The national team term was coined in 2015 to describe large, state-affiliated institutions that intervened to prop up the stock market, and was also used to describe the institutions behind very large inflows to some broad-market ETFs in August this year.

However, in its latest report, Z-Ben for the first time noted significant involvement from a range of other institutions, including China Reform Holdings, a large, state-owned asset management company, and insurers China Life and New China Life. In addition, in contrast to earlier buying, the latest buying has been more focused on specific sectors. China Reform, for example, pumped several hundred million renminbi into technology ETFs targeting mainland Chinese “A shares”.

“I think what’s occurred now is that there are so many ETFs that are out there that the policy managers of Beijing have had a bit of an ‘A-hah!’ moment,” said Peter Alexander, managing director of Z-Ben.

A Z-Ben report on China’s ETF market published in September noted that the onshore ETF market had grown to Rmb2tn ($280bn).

However, Alexander said the relatively small recent inflows from these new national team players could not be interpreted as an attempt to prop up the wider stock market.

Instead it could be interpreted as an intervention aimed at changing the dynamics of how the infamously volatile retail-driven Chinese equity markets work.

“Our contention is the regulators don’t think they need a Japan-like ‘we’re going to own 60 per cent of the market’,” Alexander said, referring to the huge proportion of Japanese equity ETF assets owned by Japan’s central bank.

In contrast, he said Chinese authorities were thinking: “Look, we want to have a position. We want to use it as a ballast of sorts when the markets are going in different directions. But for right now, you know, let’s just use ETFs, because it’s a much better way.”

The developments will have little immediate impact on most overseas investors using ETFs to gain exposure to China’s stock markets.

This is because, as Phillip Wool, head of research at Rayliant Global Advisors, said: “Most foreign investors trying to put money to work in Chinese companies do so through familiar names like Alibaba and Tencent, even though these companies are listed on offshore exchanges — in the US, as American depositary receipts, or in Hong Kong, as H shares.”

Those investors who made the decision to stick to a pure China play have paid dearly this year for their loyalty to the China growth story. Data provider CFRA noted that the SPDR S&P China ETF (GXC) lost 12 per cent in the year to December 11 while the iShares MSCI Emerging Markets ex China ETF (EMXC) was up 12 per cent over the same period.

GXC’s top two holdings, accounting for more than 16 per cent of its assets, are overseas-listed Tencent and Alibaba.

Wool said Rayliant, which runs the Rayliant Quantamental China Equity ETF (RAYC), a US-listed China ETF that invests directly in onshore A-shares, was interested in the implications of the latest, more focused national team investments.

He noted they were focused on state-owned enterprises involved in technology innovation and other critical sectors of the economy that have been identified as essential to Beijing’s “reform” agenda.

“That lines up with how we’ve expected state support for China’s economy and market to manifest: the focus being on companies and industries of strategic importance to China, which we believe will have a big policy tailwind going forward,” Wool said.

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He argued that the latest purchases were not aimed at changing the sentiment of overseas investors.

“We as foreign investors and observers tend to think about what’s convincing to us, but what really matters to policymakers — the ‘audience’ they’re really addressing when they set policy and make moves through the national team — is the domestic Chinese investor.”

He believed the national team involvement would eventually be effective in helping kick-start a shift in domestic investor sentiment towards A-shares, rather than the likes of Alibaba and Tencent.

“With valuations where they are . . . this is a good time to boost one’s share of China in an asset allocation, which is something we tell our clients who have a stomach for it.”

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