China moves to shore up stocks
Print Edition
CHINA struggled to shore up shaky sentiment yesterday a day after its stock indexes and yuan currency tumbled, rattling markets worldwide. But analysts warned investors to buckle up for more wild price swings in the months ahead.
Stocks fell more than 2 percent in early trade, prompting fears that exchanges were set for a second day of panic selling after a 7 percent dive on Monday set off a new circuit breaker mechanism that suspended trade nationwide for the first time.
But both the central bank and the stock regulator reacted quickly, and major indexes recouped most of their initial losses despite a late afternoon scare.
The People’s Bank of China poured nearly US$20 billion into money markets, its largest cash injection since September.
The China Securities Regulatory Commission, for its part, announced it was planning new rules to further restrict share sales by major stakeholders in listed companies, and said it would further tweak the circuit breaker mechanism amid criticism that it had fueled Monday’s sell-off.
The blue-chip CSI 300 index ended up 0.3 percent at 3,478.78 points after bouncing in a 4 percent range, while the Shanghai Composite Index dipped 0.3 percent to 3,287.71 points.
In a dilemma similar to the US Federal Reserve’s recent tapering of its stimulus program, China is trying to orderly unwind a massive and unprecedented stock market rescue last summer, while pressing ahead with reforms to allow markets to have a greater say in determining the yuan’s value.
China is also wrestling with market expectations that it will allow further depreciation of the yuan, a scenario many traders believe is inevitable as the economy slows and more investors pull capital out of the country in search of better returns elsewhere.
Authorities let the yuan weaken 4.7 percent against the dollar last year, a record yearly loss. It slipped to fresh 4-1/2 year lows on Monday, which some blamed for aggravating the stock market slump.
While the onshore yuan market has stabilized, the offshore yuan continues to price in deeper discounts; trading at 6.6373 per dollar, 1.7 percent weaker than the onshore currency.
The gap is so large as to make them effectively different currencies, increasing risks for companies and traders.
It also increases the likelihood of market-distorting arbitrage strategies, which the central bank has shown signs of being concerned about. It recently moved to suspend foreign banks suspected of implementing aggressive strategies to profit from the difference, and more enforcement is expected.
If yesterday’s policy-induced market respite proves temporary, regulators might have to freeze new share offerings again, extend a ban on certain share sales and keep the “national team” of brokerages and asset managers on the hook to keep buying and holding stocks at a loss.
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