Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Bears may be prowling around Chinese stocks again, but they're hardly spreading panic. The Shanghai benchmark index's 30-day volatility has dropped to the lowest level since December 2014, even after short interest in a Hong Kong exchange-traded fund that tracks Chinese stocks surged fivefold this month.

So Tame
The 30-day volatility of the Shanghai Composite Index hit the lowest since December 2014 on May 30
Source: Bloomberg

While investors abroad see troubles mounting in Asia's largest economy, they may be missing the two-ton panda in the room. Over the past year, China Securities Finance Corp., a state entity that invests on behalf of the government, has increased its holdings in the five stocks that carry the heaviest weighting in the Shanghai Composite Index: PetroChina, Industrial & Commercial Bank of China, Agricultural Bank of China, Bank of China and China Petroleum & Petrochemical (better known as Sinopec).

Not by just a bit. Overall, China Securities Finance has boosted the number of shares it owns in the five by more than 30 times, according to data compiled by Bloomberg. The agency isn't alone. Other state-backed funds have also been playing the stock market more actively.

It's Big, It's Here
China Securities Finance increased its holdings in the five biggest stocks in the Shanghai Composite by 34 times from last year
Source: Bloomberg

The five companies have huge influence over the Shanghai gauge, which in turn tends to drive the CSI 300, another widely followed index of China stocks. A regression using the five securities as independent variables shows that they can explain more than 80 percent of index movements.

China Securities Finance reports its holdings only quarterly, so it's hard to assess whether it's been supporting the market recently. It's clear that it stepped in most heavily after the rout in the second half. The agency made minor additions to its holdings in the first quarter, when the Chinese market went from extreme volatility to perfect calm once the National People's Congress began its annual meeting.

Smoother Road
After another bout of volatility in February, the Shanghai index has returned to calm
Source: Bloomberg

Skeptics could argue that the sudden rise in China Securities Finance's positions may have stemmed from margin calls rather than deliberate efforts to support the market. One of the entity's main roles, as stated on its website, is to provide "margin financing loan services to qualified securities companies." As stocks plunged and trades had to be unwound, it may have become an unwilling owner of shares. Equally, the agency may have intentionally sought to keep stock market volatility in check.

If China Securities Finance and other state-backed entities have been seeking to prop up the main stock indexes, that carries implications for both pessimistic and optimistic investors. First, for bears: This is a dangerous market to short. Any trader will tell you it isn't smart to take on someone with deeper pockets.

Second, for bulls: The market has yet to find its true level. If the government is trying to support prices and yet the index has failed to rise (the Shanghai Composite remains 18 percent lower for this year, even after Thursday's 3.3 percent rally), that's not a comforting sign. Were that backstop to be removed, it's anyone's guess how deep the decline would be.

With China's onshore stocks potentially about to enter to enter MSCI's emerging markets index, the scope and duration of the government's intentions are more important for global investors than ever. How much stamina does the panda have?

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at

To contact the editor responsible for this story:
Matthew Brooker at