China markets up after circuit breaker suspension

Since the Chinese market experienced unprecedented volatility in the past week, the regulator has adopted measures to calm investors’ anxiety, including scrapping the circuit breaker mechanism and restricting share sales by major shareholders of listed companies to no more than 1 percent of their companies’ total shares within three months.

Investors should expect more volatility in Chinese markets as the government attempts to shift away from a planned economy to one driven by market forces, Mark Mobius, chairman of the emerging markets group at Franklin Templeton Investments, wrote in a blog post yesterday.

The PBOC “may have been surprised at how badly China and global stock markets reacted to yuan depreciation”, said Dennis Tan, a foreign-exchange strategist at Barclays Plc in Singapore. “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 economy remains weak and there’s no driver for a market rebound”.

The People’s Bank of China has allowed the yuan to decline by about 6 percent against the dollar since August after loosening its tie to the USA currency. That means the contagion effect from China’s meltdown should, in theory, have been more limited, many experts argue. “The stock market might not do that well in the next few quarters, but it is not going to have a big impact on GDP right now”.

On Thursday night, they announced the system would be suspended.

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

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.

Thursday’s dramatic 7 percent fall in shares – in less than half an hour of trading – was precipitated by a larger-than-expected devaluation in the Chinese currency. This second shut-down from China was necessary because of the new rules implemented to avoid panic selling of shares.

“The market is still a bit unstable”, said Xiao Shijun, an analyst at Guodu Securities in Beijing.

The initial strength on Wall Street was partly due to bargain hunting, as some traders picked up stocks at reduced levels following recent weakness. “It was a crisis”, she said.

In overseas trading, stock markets across the Asia-Pacific region turned in a mixed performance during trading on Friday. We don’t know how long China will have to bleed money. China’s stock markets have little connection to the rest of its economy, but two sharp price declines this week have focused attention on the slowdown in Chinese growth.

This week’s episode has not done confidence any good. “Were they never that competent but just looked smart because there was so much low-hanging fruit?”

The thing is, as China’s economy weakens, that rate may have to pick up speed.