Will China’s ETF purchases ‘work’?

THE recent purchase of exchange-traded funds (ETFs) by China’s sovereign wealth fund, Central Huijin, marked the latest attempt by the authorities to stabilise China’s financial markets and economy. This year, the Shanghai Composite Index has fallen by over 10 per cent, and global investors are withdrawing from the market. Central Huijin had previously purchased similar ETFs in June 2013 and July 2015, resulting in an increase of over 20 per cent in the stock market within three months. But will the latest ETF purchases stave off an impending recession?

We can gain insights from Japan, which has been implementing similar policies for a considerable time. The Bank of Japan (BOJ) has been purchasing ETFs equivalent to some 3.5 per cent of gross domestic product (GDP) for over a decade as part of its quantitative easing programme to stimulate corporate investment, amounting to around US$180 billion – over 120 times more than Central Huijin’s recent purchase.

The BOJ experience

My co-authors Randall Morck from the University of Alberta, Yupana Wiwattanakantang from the NUS Business School, and I completed a joint study in 2020 and found that the BOJ purchases raised share prices, similar to Central Huijin’s experience in 2013 and 2015. The purchases also increased share issuances and provided companies with more working capital.