China: trading rallies after volatile start to 2016

Beijing also performed a dramatic U-turn on Thursday by deactivating a stock market circuit-breaker, itself was blamed for aggravating this week’s market falls.

Richard Hunter, head of equities at Hargreaves Lansdown stockbrokers, said: “With the Chinese deciding that the idea of a circuit breaker is broken, withdrawing the facility after just four days with it having been triggered twice, some stability returned to Asian markets overnight and London in turn”.

Additionally, a weaker yuan is feared to drive the global economy closer to a recession as the purchasing power of the world’s second largest economy deteriorates every time the currency is devalued. Chinese stocks were volatile Friday and other Asian markets rebounded after a plunge in Chinese prices. Another sharp drop came on Thursday, when the yuan rate fell to its lowest in about five years. In the USA, the Dow Jones Industrial Average and S&P 500 were both down 6 percent for the week, while the tech-heavy NASDAQ lost 7 percent over the same period. The drop in China’s exports is mainly the result of sluggish global demand, and a collapse of the yuan would only increases the risk of competitive devaluations in neighbouring countries – creating a so-called currency war. The Chinese media itself shows a lot of concerns on how far the equity market can fall. That means the contagion effect from China’s meltdown should, in theory, have been more limited, many experts argue. Thirdly, since July a year ago, despite market intervention, the stock market index is still signaling downward. On Thursday, it had hit $32.16, the lowest since April 2004.

China has halted trading quite suddenly for the second time this week.

Selling escalated on the People’s Bank of China’s (PBOC’s) decision to hike the yuan’s reference rate to the USA currency, dealers said.

“Policymakers should have noticed the correlation between the [yuan] and the volatility of asset markets”, said analysts at Natixis, adding investors will be paying close attention to what the central bank does next week. Analysts said the market was likely being supported by buying from Chinese government entities that have been dubbed the “National Team”.

But the policy flip-flopping did not impress many, with ridicule expressed on social media, frustration in the financial markets and confusion bordering on panic among many ordinary retail investors.

The inclusion of inexperienced investors failed to help, she said. “The ups and downs of the stock market are normal. So they re trying to comfort investors as much as they can in the near term”.

According to a Barclays Plc, Singapore’s foreign exchange strategist, Dennis Tan, the PBOC never expected China and global stock markets to react so badly to the depreciation in Yuan, and hence, they are trying to stabilize the Chinese currency to steady the stock market.

Denyer reported from Beijing.