China Has Summoned Its Stock Market 'Guardian Angels'

The "Broker Butcher" has just claimed his 32nd victim...

Banking veteran Wu Qing has long served the China Securities Regulatory Commission ("CSRC"). That's China's biggest stock regulatory agency. And it's where Wu earned his nickname – by enforcing the law to the fullest...

In a previous position at the agency, he shut down 31 illegal brokerages in the mid-2000s – about a quarter of all Chinese trading companies at the time.

But Wu's newest victim isn't a broker... And he's no lawbreaker, either.

You see, in a surprise move earlier this month, Beijing dismissed the former chairman of the CSRC. And Wu took his place.

The former CSRC head, Yi Huiman, presided over a tough period for Chinese stocks. Since his appointment in 2019, the Shanghai Stock Exchange has returned just 10%. For comparison, U.S. stocks have returned 88% in the same period.

Worse, Chinese stocks have been falling for nearly three years... erasing more than a quarter of the Shanghai Stock Exchange's market cap.

This crash has finally forced the government's hand. And calling in the Broker Butcher isn't the only step Beijing is taking to turn its stock market around.

Its latest moves might seem heavy-handed... But we've seen these kinds of measures before, as I'll explain. And in those instances, it marked the beginning of a much friendlier era for investors in China.

In the Chinese markets, it's 2015 all over again...

That year, the Shanghai Stock Exchange Composite Index plunged 40% from June to August.

The government didn't hold back. First, it cut interest rates. Then, it reduced regulation. It banned short selling. And finally, it started buying by proxy...

Beijing poured cash into a network of government-owned brokerages and financial firms nicknamed the "national team." These state-owned companies went to work, buying stocks in huge volumes.

By November 2015, the national team owned 6% of all mainland Chinese shares. It was a daring move. And it worked... eventually. Take a look...

Chinese stocks saw a few months of additional downside. But they bottomed soon after the national team started buying. China's "guardian angels" swooped in... And ultimately, they set a floor under China's stock market.

The national team has kept a low profile since 2015. Some of its members haven't bought equities publicly since then.

But now, history is repeating itself...

In October 2023, Central Huijin Investment (a member of the national team) bought stocks openly for the first time in eight years. It bought heavily, too – $68 million worth of bank stocks in a single day.

And its investment won't stop there. As Huijin noted in a recent statement...

We will continue to increase our holdings and expand our holdings to resolutely maintain the stable operations of the capital market.

In other words, the guardian angels are back in the market. It's a material change from the recent status quo in Chinese stocks. And it could help prices find a bottom in the months to come.

Now, I'm not saying you should load up on Chinese stocks today. This market is still in a downtrend. And in the past, it has taken months for the national team to work its magic.

Still, Beijing is on a crusade to reform the Chinese stock exchange. History suggests that the bottom is close... So keep an eye on this market in the coming months.

Good investing,

Sean Michael Cummings

Further Reading

Investors couldn't dump biotech stocks fast enough in 2023. But toward the end of the year, the sector finally caught a break and surged higher. If the trend continues, this boom-and-bust space could see even bigger gains in the coming months... Learn more here.

Gold has been hovering at record highs recently. But many investors are still ignoring the metal – and according to history, that's a mistake. Similar breakout periods have led to solid upside over the next year... Read more here.

Market Notes

HIGHS AND LOWS

NEW HIGHS OF NOTE LAST WEEK

Visa (V)... payment-processing giant
JPMorgan Chase (JPM)... financial giant
American Express (AXP)... financial giant
Wells Fargo (WFC)... financial services
Travelers (TRV)... insurance
Brown & Brown (BRO)... insurance
Cigna (CI)... health insurance
Elevance Health (ELV)... health insurance
Eli Lilly (LLY)... pharmaceuticals
AbbVie (ABBV)... pharmaceuticals
Workday (WDAY)... cloud-based software
Intuit (INTU)... tax-prep software
Airbnb (ABNB)... online vacation rentals
Disney (DIS)... streaming and entertainment
Netflix (NFLX)... video streaming
Electronic Arts (EA)... video games
Costco Wholesale (COST)... membership-only stores
Stellantis (STLA)... automaker
General Electric (GE)... manufacturing
Ecolab (ECL)... sanitation technology

NEW LOWS OF NOTE LAST WEEK

AstraZeneca (AZN)... pharmaceuticals
Gilead Sciences (GILD)... biotechnology
Hormel Foods (HRL)... food products
Avis Budget (CAR)... rental cars
Mosaic (MOS)... fertilizer
Newmont (NEM)... gold miner

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