Is the Equalization Fund really like the East Wind? Recently, a number of securities research reports have comprehensively observed the implementation of global equalization funds

Cai Lian News Agency on October 22 (Reporter Lin Jian) From Huijin Company once again increasing its holdings of the shares of the four major banks, to the central enterprise leading several waves of buybacks and increasing holdings, the market is now heating up again about the "equalization fund", and the relevant research reports of securities firms have gradually increased.

On October 16, Guojin Securities issued "Where is the East Wind?" Chief strategist Zhang Chi's team called on the establishment of the "Equalization Fund" to accelerate the establishment of the "Equalization Fund", inject incremental liquidity into the market, and promote the return of A-shares to a more rational fundamental logic; The financial team of Guosen Securities Economic Research Institute mentioned in a research report released on October 20 that the equalization fund is an important tool to reverse the difficulties of the stock market, often starting when the core index continues to fall by 35%.

Not only the above-mentioned Guojin Securities, Guosen Securities, Soochow Securities and CITIC Securities have released research reports related to equalization funds, observing the actual cases of equalization funds at home and abroad, and discussing the rationality. From overseas and historical experience, the equalization fund plays the role of economic "barometer" in boosting stock market confidence and promoting the stock market.

What should be the appropriate size of the equalization fund? According to CITIC Securities Research and analysis, combined with market practice, the size of equalization funds is mostly between 3% and 6% of the total market value. According to this calculation, as of the close of trading on June 30, 2023, the total market value of the A-share market reached 93.42 trillion yuan. If a leveling fund is really established, the scale is expected to be 2.8-5.6 trillion.

Clearly, the Equalization Fund is not a "panacea". Soochow Securities' macro team said that the equalization fund is still only a transitional means, and it must be resolved quickly, even regardless of the scale, once the front is lengthened, the policy effect and credibility will be greatly reduced.

CITIC Securities Research mentioned that the equalization funds launched during the period of economic growth bottoming and recovery tend to have better results, while the equalization funds launched during the economic downturn are relatively average.

Based on the above, the seller is also making suggestions. The financial team of Guosen Securities Economic Research Institute believes that the current purchase of broad-based ETFs is better than the selection of individual stocks, while restoring the normal financing function of the market, such as gradually resuming the IPO rhythm, and returning to normal hedging and reduction after valuation repair, so as to achieve active trading and financing. The Guoxin team also suggested that the 2015 rescue experience could be used to explore the entrustment of the stocks purchased by various securities firms and securities companies to professional institutions for management, and after guiding market expectations, they were allowed to sell at opportune times.

The picture shows the scale and effect of the Sino-US and Japanese rescue fund

Sellers are once again deeply focused on "equalization funds"

Since the third quarter of 2023, the domestic economy has gradually shown signs of bottoming, and the recovery momentum is gradually strengthening, why is the performance of A-shares still stagnant? Zhang Chi, chief strategist of Guojin Securities, believes that looking back at history, the confirmation of "policy bottom" - "valuation bottom" - "profit bottom" to the final "market bottom" often corresponds to two core elements:

First, "wide currency" to "wide credit" must be smoothly transmitted, which will be conducive to releasing incremental liquidity and supporting the "valuation recovery";

Second, the domestic economy has rebounded, often accompanied by a significant recovery in real estate investment.

Although the "market bottom" of A-shares in this round has appeared, there has been no significant rebound. Zhang Chi said that on the one hand, in terms of valuation, the "valuation bottom" has appeared, but the momentum of valuation expansion tends to decline; On the other hand, as far as real estate is concerned, its risk trend has expanded year-to-date, becoming a hidden danger that the domestic economic recovery may be "interrupted" at any time.

Looking ahead, Zhang Chi said that the improvement of residents' medium- and long-term credit in September will help curb the aggravation of real estate risks, ease investors' concerns about potential risks to the domestic economy, and strengthen the sustainability logic of fundamental recovery; However, the "M1%-short-term financing %" has not seen significant improvement, which means that the momentum of valuation expansion is still insufficient. Therefore, we call for the establishment of the "equalization fund" to accelerate the establishment of the "equalization fund", inject incremental liquidity into the market, and promote the performance of the A-share market to return to a more rational fundamental logic.

Review of overseas equalization fund practice

From a practical point of view, Japan, South Korea, Hong Kong and Taiwan use stock market equalization funds more, while more mature capital markets such as Europe and the United States are more often manifested as "quasi-equalization funds" with a package of rescue measures. The effect of the equalization fund is related to the size of the equalization fund, the timing of its launch and supporting policies.

According to the analysis of the macro team of Soochow Securities, the intervention fund of the Japanese stock market has relatively distinct characteristics: it was established earlier, the number of market bailouts is also large, and there are direct capital injection measures by the central bank. As early as the 40s of the last century, the Japanese government guided banks and institutional investors to buy stocks to a certain extent to moderate the decline in stock prices, and since then, Japan has launched equalization funds or more direct methods to rescue the market:

(1) In 1963, the export-oriented Japanese economy was affected by the tax hike policy in the United States, and the termination of a large number of Japanese investment trusts hit the Japanese stock market, and the Nikkei 225 index fell 26% from the year's high at the end of 1963. Against this background, the Japanese government convened banks and securities firms to discuss rescue measures, and in January 1964, it established the Japan Common Securities Fund, funded by 14 banks and 4 securities companies, and invested 190 billion yen in the stock market to rescue the market, mainly buying oversold index stocks. In January 1965, the government added another 320 billion yen to buy stocks other than constituent stocks to stabilize the situation. After two entries, the Nikkei 225 finally stopped falling and recovered in the third quarter of 1965.

(2) In 1995, after the bursting of the stock market bubble and gradually stabilized, the Japanese economy weakened again, and the impact of the earthquake disaster caused the Nikkei 225 index to lose nearly 4,000 points in the first half of the year. In June 1995, the Japanese government organized the banking industry to set up a stock market stability fund, investing about 2 trillion yen, which basically erased the decline of the Nikkei 225 index during the year.

(3) In 2010, in the face of a more severe impact of the global financial crisis, the Japanese government took more direct measures - the central bank purchased ETFs and stocks through trusts, with a scale of 1 trillion yen that year, rapidly enhancing stock market liquidity, and after Kuroda became governor in 2012, the central bank's direct entry into the market increased, and after the outbreak of the epidemic, the daily central bank's purchases also reached a record high - in April 2020, nearly 1.5 trillion yen ETFs were purchased in January alone. With the long-term intervention of the Bank of Japan, Japanese stocks also came out of the bottom in 2012 and continued to rise after the adjustment.

In addition, after the establishment of the Korea Equalization Fund, it has repeatedly suppressed the sharp decline of the stock market, and the response was relatively rapid, and the rescue funds took effect relatively quickly after entering the market:

(1) In 1989-1990, when the Korean stock market bubble burst, the Korean government established the Stock Market Stabilization Fund in May 1990, with brokerages, banks and insurance companies contributing a total of 4 trillion won, and invested about 2.6 trillion won again in September.

(2) In 2003, the butterfly effect caused by the Korean credit card crisis spread to the stock market, and the Korean securities industry established a 400 billion won investment fund to respond.

(3) When the financial crisis broke out in 2008, the Korea Composite Index (KOSPI) lost nearly half of the stock index in half a year, and South Korea quickly set up a leveling fund to inject liquidity into the stock market on a monthly basis, and the stock market also bottomed out.

(4) In 2022, the new crown epidemic coupled with the Fed's interest rate hike, South Korea's stock market continued to decline, as of September when the prevention and control was lifted, the KOSPI index had fallen by 25% during the year, and the South Korean financial sector issued a package of rescue measures in October, including the purchase of corporate bonds and commercial paper, and the restart of the stock market stability fund, and the Korean stock market stabilized in the same month.

Based on the above practices, CITIC Securities Chengqiang summarized three characteristics. (1) Large-scale equalization funds are often launched in response to crises and malicious short-selling, and small-scale equalization funds can also achieve better results when properly used. (2) Equalization funds launched during the period of economic growth bottoming and recovery tend to have better results. (3) If the introduction of the equalization fund is accompanied by a package of monetary and fiscal policies, it will help promote a virtuous circle of economic reality and market expectations and achieve better results.

What should I pay attention to when setting up an equalization fund?

The financial team of Guosen Securities Economic Research Institute believes that in the short term, the market entry effect of the equalization fund mainly depends on the scale of funds and the market valuation level at that time, and does not change the rhythm of market operation in the long term. Among them, the establishment of the equalization fund has its own reasonableness, but the potential moral hazard in the investment process should be avoided.

The above team pointed out that based on the experience of overseas, especially in the United States, Japan and Hong Kong, it is necessary to carefully design the fundraising, market entry and exit mechanism of equalization funds, such as to avoid potential moral hazard in the rescue market.

The macro team of Soochow Securities also mentioned that in combination with Chinese and overseas practices, there are three aspects of cautions for the use of "equalization funds": first, compared with the normalized "leveling funds", the effect of camera-based selective capital intervention will be better, and the negative teaching materials are Japan after the financial crisis and Taiwan (after 2000); Second, "equalization funds" need "thresholds" and "timing" to enter the market, and a large decline in stocks, a vicious circle of irrational capital outflow, limited effects of other conventional policies and low trading volume are important conditions for selling.

(Cai Lian News Agency reporter Lin Jian)