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Shanghai - China’s stocks and currency are going nowhere amid speculation the authorities are seeking to maintain stability in the nation’s financial markets before a string of key events.
The Shanghai Composite Index and the yuan are trading near their average level for the past two months, while volatility in both has fallen to the lowest since at least February.
Wednesday sees highly anticipated decisions by central banks in Japan and the US, the yuan will join the International Monetary Fund’s basket of reserve currencies on October 1, and public holidays will shutter China’s markets for the whole first week of October.
"State intervention makes the market less speculative now," said Dai Ming, a fund manager at Hengsheng Asset Management in Shanghai. "With the US entering a cycle of interest-rate increases, the pressure for the yuan and the stock market to decline is building up."
While China’s stock market is not alone in experiencing muted trading, the subdued nature of the nation’s shares follows extreme intervention by policy makers to stabilize the market in the wake of last year’s $5trn rout.
Narrowing price swings in the currency contrast with turbulence in yuan funding costs in Hong Kong, which surged on Monday amid speculation the People’s Bank of China is mopping up liquidity to boost the exchange rate. The PBOC said on Tuesday that the speculation wasn’t accurate.
BoJ meeting
The Shanghai Composite added 0.1% at the close. Combined turnover on China’s two equity exchanges declined to 697 billion yuan in the previous two days, the lowest in six months, according to data compiled by Bloomberg. The Hang Seng Index gained 0.6% in Hong Kong at 09:51. The yuan was little changed in Shanghai.
The BOJ On Wednesday shifted the focus of its monetary stimulus programme on Wednesday, seeking greater flexibility to manage its side effects while strengthening its commitment to stoking inflation over the longer term. All but four of 102 economists surveyed by Bloomberg predict the US Federal Reserve will hold off from raising interest rates at its meeting the same day.
Renewed pressure
"Traders are not willing do any trades at this point, because the market wants to wait for news from the Fed while there’s limited expectation that China would make any major moves now," said Banny Lam, head of research at CEB International Investment in Hong Kong.
Fed chair Janet Yellen’s "comments will likely lean towards the hawkish side, as the US economy has been doing well lately, and that will lead to a renewed round of pressures for the yuan and China stocks," he said.
The Shanghai Composite has fallen 15% this year to be among the world’s worst performers, while the yuan has lost 2.7%, Asia’s biggest decline.
The overnight cost to borrow the offshore yuan in Hong Kong jumped the most since January to 23.7% on Monday, raising speculation that China’s central bank intervened to fend off bearish bets. The funding cost dropped to 3.9% on Wednesday.
On the mainland, the cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, rose 2 basis points to 2.56%. That’s the highest since June.
The seven-day repurchase rate, a gauge of interbank funding availability, gained 8 basis points to 2.52%, weighted average prices from the National Interbank Funding Center show. The yield on 10-year sovereign bonds increased one basis point to 2.76% on Wednesday.
