Why did China’s stock market crash and how did its sovereign wealth fund respond?

China‘s stock markets plunged on Monday, marking their steepest decline in five years, as a fresh round of U.S. tariffs reignited fears of an all-out trade war with global implications. The Shanghai Composite Index tumbled by 7%, rattled by Washington’s imposition of an additional 34% levy on Chinese imports. Beijing responded swiftly and in kind, triggering a wave of panic selling across sectors, with equities sinking by as much as 9% intraday before partially rebounding.

In a dramatic move to shore up investor confidence and contain the selloff, China’s sovereign wealth fund, Central Huijin Investment Ltd, issued a rare public statement confirming it had increased its holdings in China-listed shares through exchange-traded funds (ETFs). The intervention underscored Beijing’s resolve to stabilise its capital markets, which have become a key barometer of domestic economic sentiment amid external pressure.

Central Huijin, a subsidiary of China Investment Corporation, said it would continue buying equities to “safeguard the smooth operation of the capital market,” echoing prior policy measures taken during past periods of financial stress. The timing and visibility of the statement were widely interpreted by analysts as a coordinated effort by the state to place a floor under the market’s freefall and avert a deeper crisis of confidence.

What are the implications of the US-China tariff escalation on Chinese equities?

The current bout of volatility was triggered by U.S. President Donald Trump’s decision last week to ramp up trade tariffs on China, a move that reignited geopolitical and economic concerns. The retaliatory actions by Beijing mirrored the 34% tariff rate, escalating a conflict that investors fear could disrupt global supply chains and push the world economy toward recession.

Since the announcement of the new tariffs, Chinese equities have declined by 7.6%, a relatively moderate slide when compared to the 13% drop recorded by Japan‘s Nikkei index over the same period. However, the extent of Monday’s market reaction suggests that sentiment remains fragile, and investors are closely monitoring any signs of escalation or diplomatic resolution.

Trade war risks continue to cast a long shadow over Chinese businesses, many of which are struggling to manage pricing strategies, secure new orders, and maintain customer retention amid heightened uncertainty. A prolonged trade standoff threatens to further squeeze margins and deter investment, particularly in export-heavy sectors like manufacturing and technology.

How effective is Central Huijin Investment’s market intervention strategy?

Central Huijin is one of the principal actors in China’s so-called “National Team,” a loosely coordinated group of state-backed institutions tasked with stabilising financial markets during periods of extreme volatility. Alongside China Securities Finance Corporation and investment arms under the State Administration of Foreign Exchange, Huijin has a history of stepping in during crisis moments — most notably during the 2015 stock market crash and again in the spring of 2024.

At the end of last year, Central Huijin reportedly held ETF assets worth approximately 1 trillion yuan ($137 billion), according to estimates by Guosen Securities. Its involvement in markets typically targets blue-chip ETFs, including the Harvest CSI 300 ETF, ChinaAMC CSI 300 ETF, and E Fund SSE 50 ETF — all of which saw record trading volumes on Monday. These funds track major indices and are often seen as proxies for broader market sentiment. The spike in volumes suggests aggressive state-backed buying activity designed to absorb panic-driven sell orders and send a signal of confidence to the market.

In a statement, Huijin reiterated its “firm optimism” about the long-term prospects of China’s capital market and highlighted the investment value of A-shares — a reference to stocks listed on the Shanghai and Shenzhen exchanges that are available to domestic investors and qualified foreign institutions.

What are analysts saying about the outlook for China’s markets?

Market experts offered mixed reactions to the state intervention, with some expressing confidence that coordinated state support would limit downside risk, while others warned that such measures might only provide temporary relief in the face of deeper structural headwinds.

Wen Hao, a stock trader and executive at quantitative financial services provider Yingzhiliang Hangzhou Technology, suggested that the presence of Huijin and other state funds would likely curb further declines. He added that policymakers may also consider complementary measures such as monetary easing and fiscal stimulus to stabilise the broader economy and encourage consumer spending.

However, William Xin, chairman of Spring Mountain Pu Jiang Investment Management, took a more cautious view. He indicated that while sovereign fund support may prevent immediate collapse, it cannot fully insulate markets from the long-term damage of an entrenched trade war. Xin warned that businesses face immense operational uncertainty, and advised investors to avoid aggressively buying into weakness. “Hunting for bargains now is like catching a falling knife,” he remarked, preferring to wait for clearer signals of market stability before deploying capital.

How does this compare to past Chinese market interventions?

China has a track record of direct market interventions, often led by Central Huijin, to restore stability during selloffs. In 2015, when stock indices collapsed by more than 30%, Huijin and other state-backed investors deployed hundreds of billions of yuan to purchase shares, calming markets that were at risk of spiralling out of control. Similar actions were observed during the COVID-19 market panic in early 2020, and more recently during the 2024 spring crash.

What sets this current intervention apart is the broader geopolitical context. Unlike prior episodes that were largely driven by domestic over-leverage or speculative excesses, this crisis is rooted in trade policy conflict between the world’s two largest economies. This not only amplifies market volatility but also reduces the efficacy of conventional monetary or fiscal tools in isolation. As a result, investor sentiment hinges heavily on the trajectory of U.S.-China relations, which remain fraught with unpredictability under Trump’s second presidential term.

Are other Asian economies also taking steps to stabilise financial markets?

China’s intervention is part of a broader regional trend, as financial authorities across Asia attempt to pre-empt market destabilisation. Indonesia’s central bank recently pledged to aggressively intervene in currency markets to support the rupiah, while Taiwan’s financial regulator has introduced curbs on short-selling to prevent panic-driven declines in equities.

These coordinated moves reflect growing concern that trade tensions could spill over into a broader financial contagion, particularly for export-dependent economies in Asia. While China’s vast reserves and policy flexibility give it more tools than most, smaller economies may find it harder to weather prolonged trade shocks without significant foreign capital outflows.

What are the long-term risks to China’s economic outlook amid trade war pressures?

Even with state funds stepping in, China faces significant headwinds as it navigates an increasingly hostile external environment. The uncertainty around tariffs, combined with weak global demand and persistent deflationary pressures at home, threatens to stall growth. Efforts to pivot toward domestic consumption and technological self-sufficiency have yet to fully offset the drag from reduced exports.

Moreover, foreign investor confidence may take time to recover. Although ETFs backed by Central Huijin saw record interest on Monday, many institutional investors remain on the sidelines, awaiting more clarity on how the trade war will evolve. Regulatory overhauls, currency fluctuations, and the risk of secondary sanctions all contribute to the cautious sentiment.

As Beijing continues to deploy its sovereign wealth tools to stabilise capital markets, it faces a delicate balancing act between short-term intervention and long-term economic recalibration. Sustained market confidence will likely depend less on the scale of buying by Central Huijin and more on whether policymakers can successfully navigate the broader macroeconomic storm triggered by geopolitical conflict.