One of the great unknowns surrounding the outlook for both risk and the global economy, is why China has not been more successful in stimulating both its economy and its stock market. On the first, one can point to the collapse in Chinese credit creation, which as we discussed two weeks ago, just posted its lowest growth on record...

...which some have attributed to local banks' unwillingness to inject new credit as a result of the surge in Chinese corporate defaults coupled with Beijing's lukewarm willingness to flood the system with another debt tsunami.

But what about local Chinese stocks? While not nearly as important for the local wealth effect as in the US - in China financial assets are at most 30% of household net worth compared to 70% in the US - the continued deterioration in the Shanghai Composite has been welcome by president Trump who frequently highlights the pain in Chinese risk assets as confirmation that he is winning the trade war with Beijing.

What is even more surprising, is that it now appears that this is precisely what Beijing wants.

According to Goldman, which has analyzed fund flows into and out of Chinese stocks in Q3, the bank finds that overseas investors continued to raise exposure in A shares, perhaps fueled by speculation that Chinese stocks are now sharply undervalued. In fact, China's A-share ETFs received Rmb80bn inflows in the past 3 months, with both onshore and offshore A-share ETFs seeing net subscription. Also, 28 new passive equity funds (64 ytd) have been set up since July, raising Rmb60bn.

Adding to the confusion, in the third quarter, Goldman counted the largest buybacks in China A shares (Rmb15bn) and 2nd largest for HK (US$2.3bn) on record. At least in the US, this would be sufficient for stocks to if not surge, then at least post modest gains, and yet in Q3, the Shanghai Composite was effectively unchanged.

The reason for this may be in what the Chinese National Team, i.e. Beijing's Plunge Protection Team, was doing in Q3. And that, in a word, is "selling."

According to Goldman, the "National Team" was a net seller in 3Q18; the bank says that its bottom-up estimates suggest the "National Team" net sold Rmb104BN in 3Q. This was the biggest quarterly sale by the National Team since the Chinese stock bubble popped in late 2015, and perhaps on record.

Putting the National team's holdings in context, as of Sept. 30 they accounts for close to 7% of the A-share market, translating into Rmb3 trillion. worth of market cap.

Furthermore, as Goldman calculates, in Q3 the Chinese plunge protectors reduced their holdings in all sectors, dumping financials the most.

Looking at specific names, here is a list of the Top 5 names which saw the most buying and selling in Q3.

Which begs the question: why would Beijing add to its stock market turmoil and embarrassment, if only from a purely political perspective in the ongoing trade war with the US, by not only keeping the price-indescriminate plunge protectors out of the market, but also actively dump a near record amount of shares, making any Chinese stock market gains virtually impossible?

The answer to this very important question may prove elusive, especially since according to Goldman, the National Team may have started buying the market in early/mid Oct. That said, with the Shanghai Composite now below where it was on Sept 30, Beijing may need to double down on its efforts to levitate local stocks... if indeed that is what it hopes to do.