China’s major stock indexes regained some ground yesterday after Beijing ditched a circuit breaker mechanism that halted trading twice this week and had been blamed for exacerbating the market sell-offs it was designed to limit.
The People’s Bank of China (PBOC) also raised its guidance rate for the yuan for the first time in nine trading days, after having allowed the currency’s biggest fall in five months on Thursday.
With the stocks circuit breaker deactivated late on Thursday, the CSI300 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.
Photo: Reuters
The CSI300 had lost about 12 percent in the first four trading days of this year, giving up all the gains made last year.
The circuit breaker, which only came into effect on Jan. 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,” Kaiyuan Securities Co Ltd (開源證券) analyst Tian Weidong (田渭東) said. “Investors can buy and sell as they wish. Under the circuit-breaker mechanism, the market was suffocated.”
John Woods, chief investment officer, Asia-Pacific, at Credit Suisse’s private bank, said the turmoil seen this week was likely to be a “short, sharp shock,” similar to last summer’s China stocks crash, which ironically first convinced the stocks regulator of the need for a circuit breaker.
To calm currency markets, the PBOC set its daily midpoint rate for the yuan at 6.5636 per US 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 at about 7:30am GMT, while the offshore yuan was about 1.4 percent weaker at 6.686, narrowing a spread that reached about 2 percent a day earlier.
Since the PBOC devalued the yuan by about 2 percent in August last year, the onshore-offshore spread had been growing, encouraging an outflow of capital that Beijing has been struggling to stem through measures including halting some forex business by a number of foreign banks, and ordering banks in some trading hubs to limit clients’ dollar purchases, sources said.
“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,” JPMorgan Asset Management market strategist Yoshinori Shigemi said.
After its sharply lower fix on Thursday, the PBOC had later sown confusion by reportedly intervening heavily to defend the yuan in offshore trade, reversing a decline of more than 1 percent that took it to a record low of 6.76 to the US dollar.
That left dealers at a loss to know what the central bank’s aims were.
“Market volatility this week suggests that nobody really knows what the policy is right now. Or if the government itself knows, or is capable of implementing the policy even if there is one,” DBS bank said. “The market’s message was loud and clear, that more clarity and less flip-flopping is needed going forward.”
Sources said on Thursday that the PBOC is under increasing pressure from policy advisers to let the currency fall quickly and sharply, by as much as between 10 and 15 percent, as its recent gradual softening is thought to be doing more harm than good.
However, Oversea-Chinese Banking Corp said yesterday’s fix gave a better insight into PBOC policy, as it calculated that it returned the yuan to about the 100 level on the RMB index, a basket of currencies, against which the central bank has said it prefers to benchmark the currency, rather than a direct US dollar rate.
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