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Xiaping, China - The worst start for Chinese markets in two decades showed no signs of letting up after the central bank cut its yuan reference rate by the most since August, sparking a selloff in stocks that forced the $6.6 trillion market to shut early.
China’s CSI 300 Index plunged 7.2% before bourses were halted by circuit breakers in the first half hour of trading, while the onshore yuan weakened 0.6% versus the dollar to a five-year low. The People’s Bank of China cut its reference rate on Thursday for an eighth straight day, fuelling concern that tepid economic growth is prompting authorities to guide the currency lower.
While a weaker yuan would support China’s flagging export sector, it also boosts risks for the nation’s foreign-currency borrowers and heightens speculation that the slowdown in Asia’s biggest economy is deeper than official data suggest. An unexpected yuan devaluation in August roiled global markets on concern the move would trigger a currency war and exacerbate deflationary pressures in the developed world.
“This is insane,” said Chen Gang, the chief investment officer at Shanghai Heqi Tongyi Asset Management Co, which manages about 300 million yuan ($46m). “We liquidated all our holdings this morning” after stocks hit stop-loss levels, he said.
Circuit breakers
China’s stock exchanges closed at 09:59 local time, just 29 minutes after markets opened, as the CSI 300 extended this year’s decline to 12%. Trading was halted for half the morning after a 5% drop triggered an earlier suspension. China’s markets are normally open from 09:30 to 15:00, with a 90-minute break in the middle.
The new circuit breakers, which also kicked in on Monday, have been criticised by analysts for exacerbating declines as investors scramble to exit positions before getting locked in by the halts. Policy makers need to “gradually explore, gain experience and make adjustment” to the rules, China Securities Regulatory Commission spokesman Deng Ge said in a statement on Tuesday.
“Unfortunately, the market rules - in this case circuit breakers - aren’t allowing for people to seek a rational vantage point,” Brett McGonegal, co-chief executive officer of Reorient Group in Hong Kong. “Once the 5% halt is lifted, the selling frenzy is already queued up.”
Investors spooked
The yuan weakened 0.6% to 6.5927 per dollar at 11:34 local time in Shanghai. The currency rallied from early declines in offshore trading, strengthening 0.5% in Hong Kong amid suspected intervention.
“The yuan’s depreciation has exceeded investors’ expectations,” said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co. “Investors are getting spooked by the declines, which will spur capital outflows.”
The People’s Bank of China has been burning through its foreign-exchange reserves to prop up the currency, with the stockpile recording its first-ever annual decline last year, as the central bank sold dollars in both the onshore and offshore markets. The support has been more sporadic since early December after China succeeded in persuading the International Monetary Fund to admit the yuan into its reserves basket.
Soft data
China is due to report foreign-currency reserves on Thursday, with the median estimate in a Bloomberg survey predicting a $23bn decline in December. Government data next week are forecast to show Chinese exports shrank for a sixth straight month in December. The private Caixin Media and Markit Economics Chinese services gauge fell to a 17-month low, according to a report released Wednesday.
“There have been a lot of concerns lately about the economy, with the data coming in rather soft,” said Gerry Alfonso, a trader at Shenwan Hongyuan Group Co. in Shanghai. “The volatility in the FX market amplifies those macro concerns and that’s clearly not a positive for the stock market.”
Global investors shouldn’t necessarily interpret losses in Chinese markets as a signal that the economy is worsening, according to Bloomberg Intelligence economist Tom Orlik. He said on Wednesday that early data for December point to stabilization and authorities still have room for stimulus.
Futures on the Standard & Poor’s 500 Index dropped 1.2% on Thursday, while the MSCI Asia Pacific Index declined 1.9%. Copper retreated 0.6% in London and oil slid 2.7% in New York.
