China stocks still shaky, more price swings ahead

INEVITABLE? As more investors pull capital out of China in search of better returns elsewhere, the country is wrestling with market expectations that it will allow further depreciation of the yuan.


    Jan 06, 2016

    China stocks still shaky, more price swings ahead


    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 per cent in early trade, prompting fears that exchanges were set for a second day of panic selling, after a 7 per cent dive on Monday set off a new "circuit breaker" mechanism, suspending 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 (S$28.4 billion) into money markets, its largest cash injection since September, and traders suspected it was using state banks to prop up the yuan at the same time.

    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 fuelled Monday's sell-off.

    The blue-chip CSI300 index ended up 0.3 per cent at 3,478.78 points after bouncing in a 4 per cent range, while the Shanghai Composite Index dipped 0.3 per cent to 3,287.71 points.

    How long any reprieve will last is still in question.

    In a dilemma similar to the United States Federal Reserve's recent tapering of its stimulus programme, Beijing 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.

    Its heavy-handed approach to the stock market crash and its surprise devaluation of the yuan in August had called its policymaking into question and sparked global market volatility.

    Keeping China's notoriously volatile and speculative stock markets stable will be a trick. Some market watchers say the government's interventions have kept stock valuations excessively high, given the cooling economy and falling profits.

    "Today's problem is the legacy of the government's heavy-handed intervention last year," said Yang Hai, analyst at Kaiyuan Securities. "The patient was desperately looking for treatment but took the wrong medicine that only prolonged the illness."

    Government actions have also suppressed trading volume, leaving the market more susceptible to big price swings, and discouraged foreign investors who tend to hold stocks longer than hit-and-run local retail investors.

    "We've been waiting for a market drop like this for a long time," said Samuel Chien, a partner of Shanghai-based hedge fund manager BoomTrend Investment Management. "The economy is poor, stock valuation is still high and the yuan keeps sliding, showing capital outflows are accelerating. The market drop is overdue."

    Indeed, some retail investors told Reuters they would steer clear of stocks after being burned this week.

    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 per cent against the US dollar last year, a record yearly loss. It slipped to fresh 41/2 year lows on Monday, which some blamed for aggravating the stock market slump.

    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.