China equities face support buying as AI trade reverses

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China equities face support buying

Highlights

Beijing's state-backed funds executed their most aggressive ETF support buying since April 2025 to stem the CSI 300's more than 20 per cent drop from its June peak.
Mainland Chinese investors have sold HK$20bn in Hong Kong stocks so far in October, putting the month on pace for the largest outflows since July 2021.
Despite Beijing's mortgage subsidies and earlier share buyback measures, retail sales remain weak and fixed-asset investment fell 7.2 per cent year-on-year through September, while fiscal policy has turned contractionary.

State-backed support targets market slide

As reported by the Financial Times, Beijing is deploying its so-called national team of state-aligned funds and brokers to buy shares and discourage domestic investors from pulling more money from the market.

The CSI 300 index of Shanghai- and Shenzhen-listed stocks has entered a technical bear market, down 10 per cent year to date and more than 20 per cent from its June peak. Analysts at Macquarie say national team purchases of domestic exchange traded funds last week were probably the most aggressive since Donald Trump’s “liberation day” tariff announcement in April 2025, using net inflows into ETFs held by state-owned investor Central Huijin as a proxy.

Macquarie says the buying is intended to put a floor under the market, but a sustained rally still depends on a recovery in domestic demand. That recovery may come only once Beijing can no longer rely on exports to drive growth, the analysts wrote in a note on Tuesday.

AI hardware shares are among the hardest hit in the sell-off. The CSI 300 industrials sub-index is down 23 per cent since the start of the year, while CATL, its largest constituent, has fallen 37 per cent in Shenzhen over the same period. CXMT, China’s largest producer of DRam chips, is down 20 per cent in the past month after its strong July IPO, even as China continues pushing AI competition with the U.S. through open-source models from groups such as DeepSeek and Moonshot.

Hong Kong outflows deepen pressure

The market weakness is also weighing on Hong Kong, where mainland Chinese investors, a key source of demand for local equities, have sold HK$20bn of stocks so far this month. That puts October on track for the largest month of mainland outflows since July 2021, based on Financial Times calculations.

Hong Kong’s Hang Seng index has fallen more than 12 per cent this year, while its tech sub-index is down more than 30 per cent. Analysts also point to tighter government scrutiny of offshore wealth and trusts as a trigger for selling, particularly in Hong Kong, with some investors possibly raising cash to meet tax bills that could stretch back decades.

Broader policy and economic conditions are adding to the strain. Beijing gave markets a significant boost in September 2024 with measures including financing for share buybacks, but expectations for large-scale stimulus have faded this year as recent data show government spending declining in the first nine months.

Kinger Lau, chief China equity strategist at Goldman Sachs, says fiscal policy has turned contractionary rather than expansionary, calling it one of the year’s major surprises. China’s economic data also point to weaker momentum, especially in consumer demand: retail sales declined in May for the first time since late 2022 and have stayed subdued, while fixed-asset investment is down 7.2 per cent year on year in the nine months to the end of September, despite strong exports.

Last month, Beijing unveiled new mortgage subsidies that many investors viewed as modest relative to the scale of the country’s prolonged property downturn. China’s top Communist Party leadership is meeting for a discipline-focused fifth plenum this week, and some analysts still hope the gathering could lead to a policy shift.

In our earlier coverage of Beijing’s late-September policy support for China’s slowing economy, we outlined expectations for a modest pickup in third-quarter growth despite ongoing weakness in consumption, private investment, and the property market. We also noted that targeted rate cuts, mortgage subsidies, and the use of unused local government debt quotas were meant to shore up activity, while strong exports and factory output continued to mask soft domestic demand.

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