China bourses among world’s worst performers in 2016

Feckless policymakers, massive capital flight, falling yuan roil market

SHANGHAI, Dec 30, (AFP): China is the world’s second-largest economy and has one of the fastest growth rates of any G20 nation, but its stock markets have been among the worst performing in the world this year.

Starting with a botched attempt to reduce volatility that instead triggered a spectacular meltdown, Chinese bourses have spent the year struggling against feckless policymakers, massive capital flight and a languishing currency.

The benchmark Shanghai Composite Index (SCI) closed Friday down 12.3 percent for the year, compared to a rise of 0.4 for Japan’s Nikkei 225, while Hong Kong’s Hang Seng index also rose 0.4 percent.

China was vying with debt-ridden Portugal for last place among the 40plus countries tracked by Wall Street Journal’s Market Data Center.

It is a significantly worse performance than 2015’s wild ride, when the SCI surged by 60 percent in the first half before plunging by more than 40 percent in under three months. Even so, it finished the year with an overall gain of 9.4 percent.

Then authorities brought in a “circuit breaker” mechanism in January to automatically shut down trading if prices plunged. It went into effect twice in one week, kicking off a selfreinforcing selling panic that spread to global markets, and was scrapped after just four days.

“The Chinese market had a meltdown this year, and so far it has only half recovered from that,” Northeast Securities analyst Shen Zhengyang told AFP, adding the market was still in “slow and gradual restoration”.

The chairman of the China Securities Regulatory Commission was sacked over the debacle.

His replacement, Liu Shiyu, has kept a low profile, hurting market confidence and leaving investors seeking direction, said Oliver Rui, a professor at the China Europe International Business School (CEIBS).

“People don’t understand much about the regulator’s policy direction,” he said, adding that the lack of clarity partly explained the market’s weak performance.

The falling yuan -- lowered seven percent by the central bank over the year in the face of a surging dollar -- has also driven investors abroad in search of better performance.

“When the yuan falls, market capital runs off overseas to hedge the risks,” said Dickie Wong, Hong Kong-based research director for Kingston Securities, adding it also made foreign investors “less optimistic about mainland companies”.

Even the year’s few bright spots have failed to live up to expectations.

Earlier this month, China launched a long-delayed programme connecting its second exchange in Shenzhen -- which has lost 14.7 percent this year -- with the bourse in Hong Kong.

The Hong Kong-Shenzhen Stock Connect builds on a similar scheme with Shanghai and gives foreign investors access to many mainland tech shares.

But it has so far failed to live up to the hype, with Shenzhen’s shares more expensive than those in Hong Kong, making it unattractive to foreign investors, while the entry threshold for mainlanders to buy Hong Kong shares was set as high as half a million yuan ($72,000).

Other anticipated reforms, such as a new system for initial public offerings (IPOs), have all failed to materialise or were quietly shelved after January’s drama.

Currently, the Chinese government -- rather than the market -- decides which companies offer shares and when, and at what price.

As a result Chinese flotations are always underpriced, which “sends the wrong signals to the market”, according to Oliver Rui of CEIBS.

Authorities should “not intervene too much” but “are always afraid that the market will lose control”, he told WASHINGTON, Dec 30, (AP): President-elect Donald Trump has vowed to name China a currency manipulator on his first day in the White House.

There’s only one problem - it’s not true anymore. China, the world’s second-biggest economy behind the United States, hasn’t been pushing down its currency to benefit Chinese exporters in years. And even if it were, the law targeting manipulators requires the U.S. spend a year negotiating a solution before it can retaliate.

Trump spent much of the campaign blaming China for America’s economic woes. And it’s true that the U.S-China trade relationship is lopsided. China sells a lot more to the United States than it buys. The resulting trade deficit in goods amounted to a staggering $289 billion through the first 10 months of 2016.

But in fact, for the past couple of years China has been intervening in markets to prop up its currency, the yuan, not push it lower.

It went a step further on Thursday, watering down the significance of the dollar and adding 11 additional currencies in a foreign-exchange basket, according to a document released by the China Foreign Exchange Trading System.

What does currency have to do with the trade gap?

When China’s yuan falls against the U.S. dollar, Chinese products become cheaper in the U.S. market and American products become more costly in China.

So the U.S. Treasury Department monitors China for signs it is manipulating

AFP.

“But if you do not let go, then you will never know if the market can accept the new system or not. Mistakes are a necessary step.”

Unlike most global exchanges where institutions hold sway, China’s stock markets are dominated by small investors, heightening volatility and short-termism. the yuan lower. Treasury has guidelines for putting countries on its currency blacklist. They must, for example, have spent the equivalent of 2 percent of their economic output over a year buying foreign currencies in an attempt to drive those currencies up and their own currencies down.

Treasury hasn’t declared China a currency manipulator since 1994.

What would happen if the us declared china a currency manipulator? Probably not much, at least initially. If Treasury designates China a currency manipulator under a 2015 law, it is supposed to spend a year trying to resolve the problem through negotiations.

Should those talks fail, the U.S. can take a number of small steps in retaliation, including stopping the U.S. Overseas Private Investment Corp., a government development agency, from financing any programs in China. Trouble is, the United States already suspended OPIC operations in China years ago — to punish Beijing in the aftermath of the bloody 1989 crackdown in Tiananmen Square.

So naming China a currency manipulator is mostly “just a jaw-boning exercise,” said Amanda DeBusk, chair of the international trade department at the law firm of Hughes Hubbard & Reed and a former Commerce Department official. “There’s no immediate consequence.”

Is china guility of using currency to help its exporters?

For years, China pretty clearly

Government-backed funds injected billions of dollars into China’s markets in 2015 in an effort to stop them bleeding out, and still play a major role, ignoring profit, loss and everything in between, and creating huge price distortions.

“In such an environment, it’s quite difficult for investors to apply whatever money-making strategies that they manipulated its currency to gain an advantage over global competitors. It bought foreign currencies, the U.S. dollar in particular, to push them higher against the yuan. As it did, it accumulated vast foreign currency reserves — nearly $4 trillion worth by mid-2014.

But now the Chinese economy is slowing, and Chinese companies and individuals have begun to invest more heavily outside the country. As their money leaves China, it puts downward pressure on the yuan.

The yuan has dropped nearly 7 percent against the dollar so far this year.

The Chinese government has responded by draining its foreign exchange reserves to buy yuan, hoping to slow the currency’s fall. China’s reserves have dropped by $279 billion this year to $3.05 trillion.

If Beijing stepped back and let market forces determine the yuan’s level, it likely would fall even faster, giving Chinese exporters even more of a competitive edge.

So Beijing is doing the opposite of what Trump says it’s doing. Cornell University economist Eswar Prasad earlier this month called Trump’s plans to name China a currency manipulator “unmoored from reality.”

“The whole discussion is ironic,” said David Dollar, senior fellow at the Brookings Institution and a former official at the World Bank and U.S. Treasury Department. “It’s out of date.”

Could trump do anything on his own?

have learned over the years,” said Citic Securities analyst Zhang Qun.

He called China’s stock market “the least profitable” option in China or abroad.

Even so, brokers are mildly optimistic about next year -- but hedge their bets with huge ranges for their 2017 year-end forecasts.

China Merchant Securities projects

Gary Hufbauer, an expert on trade law at the Peterson Institute for International Economics, notes that as president, Trump could nonetheless escalate any dispute over the currency on his own. Over the years, Congress has ceded the president broad authority to impose trade sanctions. Trump has threatened to slap a 45 percent tax, or tariff, on Chinese imports to punish it for unfair trade practices, including alleged currency manipulation.

Brookings’ Dollar said China likely would bring a case to the World Trade Organization “against any protectionist measures that are a violation of U.S. commitments to the WTO,” which oversees the rules of global commerce and rules on trade disputes.

Some trade analysts wonder if Trump is using the tariff threat as a negotiating tool to win concessions from China.

Whatever the U.S. motive, China has a consistent record of retaliating against trade sanctions. When the Obama administration slapped tariffs on Chinese tire imports in 2009, for instance, China lashed back by imposing a tax on U.S. chicken parts.

China’s Global Times newspaper, published by the ruling Communist Party’s People’s Daily, has already speculated that “China will take a titfor-tat approach” if Trump’s tariffs are enacted. The paper suggested that Beijing might limit sales of Apple iPhones and Boeing jetliners in China.

“The Chinese are predictable and reliable,” DeBusk said. “If they get punched, they punch back.”

the SCI at anything from 2,900 -- a six percent decline -- to 3,800, which would represent a leap of 23 percent.

“With the government taking tighter controls over the property market and bonds also falling, not many choices are left,” said Kingston’s Dickie Wong.

“Funds must go somewhere and stocks are ultimately one choice.”