Chinese markets rebound slightly after volatile week

The Straits Times Index (STI) rose 0.8 per cent to close at 2,751.23 points, with all but seven of the 30 component stocks ending higher.

Bernard Aw, market analyst at IG Group, said: “The CSRC acknowledged that the thresholds of the circuit breakers did act like a magnet”. According to market experts, it failed to work as anticipated in real situations and was found to be doing more bad than good. “Under the circuit breaker mechanism, the market was suffocated”.

European markets also fell.

The benchmark Shanghai Composite Index closed down 7.04 percent to 3,125.00 Thursday, while the Shenzhen Composite Index, which tracks stocks on China’s second exchange, tumbled 8.24 percent to 1,958.09.

The People’s Bank of China said Friday it would further liberalize interest rates. The People’s Bank of China also removed some negative sentiment by lifting its guidance rate on the yuan for the first time in nine trading days.

Oil prices have rebounded and global stock markets recovered after Beijing mustered what analysts called its “national team” to intervene and boost the yuan.

The restrictions affected liquidity worse than the daily trading limit on individual stocks because the entire market may be closed early, a private fund manager said. Instead, it prompted investors to SELL when the index moved near the breaking point. The offshore yuan was trading 1.29% away from the onshore spot at 6.662 per dollar. One big reason is the weakening yuan. Officials suspended the rule after it triggered trading halts Monday and Thursday, saying it was only exacerbating declines. “Markets will be waiting to see the Chinese government’s determination to prop up the stock market and the currency into next week before any major recovery is likely to be seen”. The Dow plunged 392.41 points or 2.3% to 16,514.10, the Nasdaq plummeted 146.34 points or 3% to 4,689.43 and the S&P 500 tumbled 47.17 points or 2.4% to 1,943.09. Beijing keeps its markets sealed off from global capital flows, but due to the vast size of China’s economy, foreign investors watch them closely and react to volatility.

The yuan’s link to the dollar meant it soared as the USA currency climbed over the past year, making it overvalued by 10 to 15 percent against those of other developing countries.

In a little more than two decades, Chinese leaders have overseen a transformation that has lifted hundreds of millions out of poverty and made China into the world’s second-largest economy.

“The best way to reduce volatility is to allow the market to drop as much as it’s willing to”, said Brian Jackson, a senior economist with the China regional service of IHS, a USA market and economic information provider.

Earlier in the week, worries about China were fueled by weaker-than-expected December manufacturing activity.

The S&P/TSX composite index ended the day off roughly 20 per cent from its all-time high in September 2014 – a loss considered by many as a bear market.

But global markets reacted with an equities rout as concerns grew.