Wu Qing, the new head of the China Securities Regulatory Commission, had been in the job for less than a month when he took to the stage for a high-profile press conference in Beijing last
Wednesday.

By the end of his first answer, the “broker butcher” — as he came to be known during a stint with the commission’s risk-control unit — had left little doubt among listeners as to whether that nickname was still appropriate. “When it comes to market regulation, the key Chinese characters are ‘strong’ and ‘severe’,” he said in response to a question from state media.

With his predecessor Yi Huiman having been recently dismissed after failing to halt a long-running and embarrassing stock rout, Wu’s more forceful approach — including a crackdown on quant funds whose “abnormal” trading had allegedly dragged down valuations — appears to have produced visible results.

Since touching a five-year low in February, China’s benchmark CSI 300 index has climbed 14 per cent.

But traders and analysts say those searing gains have been driven chiefly by China’s so-called “national team” of state-run institutions buying in tandem with the CSRC’s punitive actions.

There is little renewed appetite among either local or foreign investors, many of whom want to see much more monetary and fiscal stimulus from Beijing. And strategists point to a rally in Chinese government bonds which they say reflects persistent concerns over slowing growth.

“Many investors, including us, are still sceptical, because authorities have not implemented a sufficient amount of [monetary and fiscal] easing,” said Chi Lo, senior Asia-Pacific strategist at BNP Paribas Asset Management.

“That is what’s holding back the majority of foreign investors from returning to China.” Lo said after the recent “Two Sessions” leadership summit in Beijing, clients’ views on China had shifted “from negative to neutral, but not yet to positive”.

Despite this lack of foreign demand, domestic Chinese markets have seen waves of buying from offshore investors in recent weeks, amid what traders say is an uptick in purchases by state-run buyers based in Hong Kong.

Net outflows from Chinese equities during the first month of this year have since reversed, with year-to-date inflows through Hong Kong’s “stock connect” trading scheme rising to about Rmb37.8 billion ($8.65b), according to Financial Times calculations based on data from the city’s link-up with mainland bourses.

Traders put much of this down to the state financial groups’ Hong Kong branches stepping in to help their onshore counterparts prop up shares in Shanghai and Shenzhen as needed.

“If it’s a super-negative day [the national team] will come in, but if not, they’ll conserve their ammo,” said the Hong Kong trading desk head of one Chinese investment bank.

“The global money is still definitely not here — being out of China [and invested in other markets] has made them outperformers.”

“Obviously, the national team buying in the equity market has been pretty sizeable,” said Kinger Lau, chief China equity strategist at Goldman Sachs.

The Wall Street bank estimates more than Rmb170b has been deployed directly into China’s domestic equity market by state-run financial groups this year. “From our view, that essentially puts a near-term floor beneath the market,” Lau said.

Goldman statistics on holdings of Chinese shares by international mutual funds with about US$1 trillion ($NZ1.65t) in total assets under management show that those funds remain underweight China’s market by about 3 percentage points compared with global benchmark indices.

While that margin has narrowed from about 4 percentage points a few months ago, Lau warned this mainly reflected Chinese stocks’ lowered weightings in global equity benchmarks due to the market’s smaller size after last year’s sell-off. “Even if long-onlys did nothing, the [degree to which they are underweight] would still narrow,” he said.

Strategists generally agree that limiting further downside for the country’s stocks will require China to at least hit its annual growth target of “about 5 per cent” announced on Tuesday.

BNP’s Lo said he expected policymakers to continue the trend of more aggressive policy easing seen in recent weeks, “otherwise it’s going to be difficult to achieve that growth target”.

But analysts said more substantial monetary and fiscal stimulus was not likely until after the US Federal Reserve cuts interest rates, which is expected around the middle of this year.

Yields on US Treasuries are already higher than those on renminbi bonds, and authorities are concerned a wider interest rate gap between China and the US could spur outflows and push the renminbi lower against the dollar. The currency’s dollar exchange rate is already down roughly 1 per cent this year at Rmb7.191.

Domestic investors scarred by stock market losses last year have meanwhile been piling into renminbi-denominated government debt, pushing up bond prices and driving down yields. Yields on China’s 10-year bonds have dropped 0.16 percentage points to 2.28 per cent since early February.

“There’s no risk-on sentiment among domestic investors, and if you look at yields, the consensus is for more [policy] loosening,” said a Hong Kong-based bond trader at one Chinese asset manager. “The market still thinks government bonds are set for a massive bull market.”

Authorities are also keen to limit further losses for China’s many “mom-and-pop” investors. Wu, the new CSRC head, told reporters at the press conference on Wednesday that “small and medium-size investors are not just a priority — they are the priority”.

This approach has been reflected in harsher policing over the past month of Chinese quantitative trading houses, which authorities have blamed for exacerbating the equity market sell-off during much of January and February. But experts warned that new rules warning against “abnormal trading” were too broad.

“Quant funds are an easy bogeyman to pick on,” said Fraser Howie, an independent expert on Chinese finance.

“Any time you do that, you’re sending a signal that you have no confidence in your market — and if you’re targeting one group of investors today, who says you’re not targeting another tomorrow?”