China state-backed funds sit on their hands during stocks slump

China's five state-backed mutual funds, launched during the 2015 crash to rescue the market, sat on their hands last quarter when shares slumped roughly a tenth amid trade war concerns, analysts said on Monday. The apathy, captured in their latest quarterly reports showing a drop in equity portfolios, reflects changing market conditions, as well as the government's different approach toward market weakness.
"I think the government now wants the market to adjust itself," said Shi Jin, an analyst at Shanxi Securities. "The government may have realized direct intervention may not achieve their desired result."
During the 2015 crisis, Beijing launched rescue funds, curbed short-selling activity, suspended share trading and orchestrated share buybacks, but still failed to stem savage market routs that roiled global markets.
This time, China's economy faces headwinds from the government's campaign against risky lending and escalating trade tension with the United States, but stocks are much less frothy.
After sharp share price falls in the second quarter, "we think risks have been reduced ... and A-shares are worth investing in for the medium- and long-term," Yao Shuang, fund manager of CMF FengQing Flexible Allocation Fund, wrote in its second-quarter report.
The state-backed fund saw its equity holdings fall slightly to 16.2 percent of total assets, from 17.5 percent three months earlier.
The other four government-mandated funds, ChinaAMC New Economy Flexible Fund, E Fund Ruihui Flexible Fund , Harvest New Opportunities Hybrid Fund and China Southern Consumer Vitality Flexible Fund all witnessed a decline in their equity portfolios.
There were already signs the government was starting to pull money out of the five funds.
Launched in July 2015 with total assets of 200 billion yuan ($29.5 billion) - or 40 billion yuan each - the funds' assets exceeded 250 billion yuan last year but suddenly shrank two-thirds to a combined 74.1 billion in the first quarter, after massive government redemptions.
"Our fund will continue to maintain neutral positions, with a key focus on low-valued blue-chips," China Southern Consumer Vitality Flexible Fund said in its second-quarter report.
The five funds have sizable weightings in manufacturing and finance.
In addition to the mutual funds, China's central government also holds stocks via less transparent entities, including the state margin lender, Central Huijin, and investment platforms grouped under the foreign exchange regulator.