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Hong Kong -Volatility returned to Shanghai stocks on Monday, suffering their heaviest losses since the summer rout, with most other Asian markets lower at the start of an eventful week.
Chinese dealers have been buoyed by hopes the International Monetary Fund will agree to a proposal from its executive board to include the Chinese yuan, also known as the renminbi, in its special drawing right (SDR) basket of elite currencies.
Agreement, which is widely expected, would realise a long-held goal for Beijing of giving its unit international status, alongside the dollar, euro, pound and yen.
Inclusion would lead to mainland stocks becoming more accessible to foreigners, Hao Hong, Hong Kong-based equity strategist at Bocom International Holdings, wrote in a note on Monday. The yuan weakened in morning trade against the dollar.
Despite hopes of SDR inclusion, mainland investors remain on edge after Friday's collapse, when news came that China's biggest brokerages were being probed over suspected "rule violations" in the wake of the summer sell-off.
Shanghai dived 5.5% and Shenzhen more than six percent, with losses exacerbated by worse-than-expected profits for Chinese industrial giants and worries over the start of initial public offerings (IPOs) this week.
The drop rekindled painful memories of the sharp sell-off between June and August that saw Shanghai slump 40% and trillions wiped of valuations. Shares have since recovered about 25%.
Euro down before ECB meeting
"The market, arguably, overreacted on Friday as the IPOs developments were expected and the issues facing brokers are clearly sector specific," said Gerry Alfonso, a sales trader at Shenwan Hongyuan Group in Shanghai.
"That's not to say that there aren't going to be swings in the market today but the drop was arguably a bit overdone," he told Bloomberg News.
Throughout the morning Shanghai swung from positive to negative territory.
Hong Kong was flat, while Sydney and Tokyo retreated.
Investors are keeping tabs on the release of a string of figures and meetings this week that could have market-moving effects.
Among the key events are the release of manufacturing data from major economies, a European Central Bank (ECB) policy meeting that could see further monetary easing and a US jobs report at the end of the week.
Federal Reserve chair Janet Yellen is also due to appear before Congress, with markets hoping for more guidance ahead of the central bank's expected interest rate cut next month.
"After last week's doldrums, this week's agenda will come as a shock to the system," Raiko Shareef, a markets strategist in Wellington at Bank of New Zealand said in a client note.
"Front of mind will be the ECB's policy decision. The US employment reports will garner interest, but only a disastrous result would likely derail the (Fed policy board) from raising rates next month."
Talk of further ECB stimulus has put fresh pressure on the euro, which is sitting at lows not seen since April.
Markets were given little inspiration from New York, with Wall Street trading for just half a day Friday as the country celebrated the Thanksgiving break.
