Markets stabilize as indexes rise 2%
Print Edition
CHINA’S major stock indexes regained some ground yesterday after the government ditched a circuit breaker mechanism that halted trading twice this week and was blamed for exacerbating the market sell-offs it was designed to limit.
The People’s Bank of China also raised its guidance rate for the yuan for the first time in nine trading days, having allowed the currency’s biggest fall in five months on Thursday, sending shivers through regional currencies and global stock markets as investors feared it would trigger competitive devaluations.
Chinese markets have had a turbulent start to 2016, buffeted by the central bank’s lower yuan fixings against the dollar, two days of stock exchange suspensions, weak factory and service sector surveys, and worries about looming share sales by major stakeholders once a ban on such sales expires.
With the stocks circuit breaker deactivated late on Thursday, the CSI 300 index closed up 2 percent at 3,361.56 points yesterday, while the Shanghai Composite Index also closed up 2 percent at 3,186.41 points.
The CSI 300 lost around 12 percent in the first four trading days of 2016, giving up all the gains made in 2015.
The circuit breaker, which only came into effect on January 4, came under fire for kicking in too soon with its initial pause in trading, and then encouraging a rush to sell before a second trigger halted the day’s trade permanently.
“The market is back to normal,” said Tian Weidong, an analyst at Kaiyuan Securities. “Investors can buy and sell as they wish. Under the circuit breaker mechanism, the market was suffocated.”
John Woods, chief investment officer for Asia-Pacific at Credit Suisse’s private bank, said this week’s turmoil was likely to be a “short, sharp shock” similar to last summer’s China stocks crash, which, ironically, first convinced the regulator of the need for a circuit breaker.
To calm currency markets, the central bank set its daily midpoint rate for the yuan at 6.5636 per dollar prior to market open, firmer than Thursday’s fix at 6.5646 and closing quote of 6.5929. Under China’s currency regime, the yuan is allowed to deviate 2 percent either side of the midpoint.
The yuan firmed during the day, with dealers suspecting that the central bank intervened through state-run banks to support its currency, which could help allay fears that any depreciation would be allowed to continue.
The onshore yuan was at 6.5894 around 3:30pm, while the offshore yuan was about 1.4 percent weaker at 6.6860, narrowing a spread that reached around 2 percent a day earlier.
“While the market was left with uncertainty on how far the yuan will fall, the Chinese central bank’s action (the stronger fix yesterday) was taken as a signal that it does not intend to keep allowing the yuan to fall,” said Yoshinori Shigemi, a market strategist at JPMorgan Asset Management.
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