China Still Increasing Volatlity of Natl Balance Sheet

Reuters: China forex regulator buys $4.2 bln in stocks via new platform
China's foreign exchange regulator has bought mainland stocks worth over 27 billion yuan ($4.18 billion) via three low-profile investment firms it controls, the official Shanghai Securities News reported on Thursday.

Buttonwood Investment Platform Ltd, 100 percent owned by the State Administration of Foreign Exchange (SAFE), and Buttonwood's two fully-owned subsidiaries, have bought shares in a total of 13 listed companies, the newspaper reported, citing top 10 shareholder lists in the companies latest earnings reports.
ZeroHedge quotes David Cui of BofA: "The Buttonwood SPV": The Striking Details Of How China's Central Bank Is Directly Buying Stocks
The moderate size notwithstanding, it is a big surprise to us that SAFE bought stocks directly in 4Q. This broke at least two conventions for central banks: 1) central banks do not normally buy stocks directly (as they are supposed to manage their balance sheet conservatively); and 2) FX reserves, presumably what SAFE had used to buy A-shares, should not be used to purchase domestic assets. When the FX reserves were created, the equivalent amount of local currency was already issued on the back of the FX; using FX to buy domestic assets means that more local currency is created with the same FX backing.

A more transparent way to handle this, and with the same result, is for PBoC to simply expand its balance sheet and take on these stocks without going through SAFE. PBoC's loaning to CSFC and brokers to buy stocks was controversial enough, buying stocks directly is a step further, in our view. It is difficult for us to gauge the reasons behind SAFE's move. But this cannot be enhancing public confidence in the PBoC and, by extension, in RMB, in our view (What may trigger financial instability, Jan 3).
Aside from the potential for government intervention, this is similar to China buying mining assets to bet on its own growth. If growth continues the bet pays off big, if growth fails they lose on the investments and reduce stability. This increases long-term risk for short-term stability.

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