Chi­nese stocks go on wild ride as eco­nomic gloom deep­ens

The Pak Banker - - BUSINESS -

Chi­nese stock mar­kets took a wild ride on Wed­nes­day, tum­bling and soar­ing in a ses­sion that made lit­tle sense other than to high­light that in­vestors have al­most no faith in a month-long gov­ern­ment ef­fort to sta­bi­lize them.

The Shang­hai and Shen­zhen mar­kets fell 3 per­cent in morn­ing trade, tak­ing their losses to more than 8 per­cent since in­vestors stam­peded with­out warn­ing on Tues­day. But state-backed buy­ers later rushed in, en­abling stocks to fin­ish the day more than 1 per­cent higher.

It is a pat­tern that has been re­peated sev­eral times since Bei­jing's "na­tional team", a coali­tion of state-backed fi­nan­cial in­sti­tu­tions and reg­u­la­tors, went into ac­tion early last month with in­struc­tions to halt a crash in share prices. In­vestors say China's stock mar­kets - which were never for the faint of heart - have be­come dys­func­tional since the gov­ern­ment's mas­sive and un­prece­dented res­cue ef­fort.

Prices move sharply on spec­u­la­tion about the na­tional team's ac­tiv­i­ties as in­vestors fo­cus on mak­ing quick trad­ing prof­its by pre-empt­ing its next move. Late in the af­ter­noon on Wed­nes­day, a slew of com­pa­nies an­nounced state funds had bought stakes in them, which in­vestors took as a sign that the gov­ern­ment was sig­nal­ing its con­tin­ued sup­port for the mar­ket. As of early evening, around 20 firms had made such an­nounce­ments.

Long-term in­vestors are stay­ing well to the side­lines, mov­ing their cash into bonds and the money mar­ket, as roller­coaster mar­kets and a gloomy stream of eco­nomic news heighten their anx­i­ety over the world's sec­ond-largest econ­omy. "We ad­vise strap­ping in for a bumpy ride," said Tim Con­don, head of Asia re­search for ING Bank in Sin­ga­pore. The Com­merce Min­istry added to that anx­i­ety on Wed­nes­day, say­ing ex­ports could con­tinue fall­ing in com­ing months, af­ter an 8.3 per­cent plunge in July, their big­gest drop in four months.

The econ­omy is al­ready un­der threat of de­fla­tion and pol­i­cy­mak­ers are strug­gling to re­vive bricks-and-mor­tar in­vest­ment. Bei­jing's of­fi­cial growth tar­get is 7 per­cent for this year, but some econ­o­mists es­ti­mate cur­rent lev­els are closer to half that. Com­bined ex­ports and im­ports for the first seven months of 2015 fell 7.2 per­cent from the same pe­riod last year, com­pared with Bei­jing's full-year tar­get of 6 per­cent growth.

"The pos­si­bil­ity of ex­ports to see yearon-year de­cline in some months could not be ruled out. But we will still see ex­port growth for the whole year," Com­merce Min­istry spokesman Shen Danyang told a reg­u­lar monthly brief­ing. "For the whole year, the for­eign trade will face more se­vere sit­u­a­tion than we ex­pected."

Only last month, the min­istry pre­dicted ex­ports would im­prove in the sec­ond half of this year from the first half. The Shang­hai mar­ket closed up 1.2 per­cent and Shen­zhen jumped 2.2 per­cent. The bench­mark CSI300 in­dex .CSI300, com­pris­ing blue-chip stocks from both mar­kets, rose 1.6 per­cent. The re­bound fol­lowed news the cen­tral bank would of­fer more medium-term funds to banks, in ad­di­tion to a 120 bil­lion yuan ($19 bil­lion) in­jec­tion of funds into money mar­kets on Tues­day. The cen­tral bank con­firmed later in the day it lent 110 bil­lion yuan of six-month cash to help main­tain suf­fi­cient liq­uid­ity in the mar­ket.

Sources fa­mil­iar with the medi­umterm fund­ing plan said this would help off­set the drain on liq­uid­ity caused by China's un­ex­pected de­val­u­a­tion of the yuan last week. The prospect of fur­ther weak­en­ing has prompted in­vestors to swap yuan into U.S. dol­lars.

Cap­i­tal out­flows from China are ex­pected to in­crease as in­vestors grow more pes­simistic over the out­look for the cur­rency and the econ­omy, and calls are grow­ing for the Peo­ple's Bank of China (PBOC) to roll out sup­port mea­sures more swiftly and ag­gres­sively to shore up growth. High­light­ing grow­ing anx­i­ety, money-mar­ket in­ter­est rates ticked higher on Wed­nes­day, de­spite the fresh fund in­jec­tions from the cen­tral bank. The weighted av­er­age bench­mark seven-day re­pur­chase agree­ment rate rose four ba­sis points to 2.53 per­cent.

The PBOC de­val­ued the cur­rency on Aug. 11, within a few days of the poor July ex­port data and other of­fi­cial fig­ures show­ing fac­tory-gate prices con­tin­ued their three-year slide in July, touch­ing a six-year low. A week later, the cen­tral bank is still strug­gling to con­trol the fall­out. Though it in­sists the yuan has no rea­son to fall fur­ther, most econ­o­mists be­lieve there is po­lit­i­cal pres­sure to let it slowly slide, which will put more com­pet­i­tive pres­sure on China's ex­port-re­liant Asian neigh­bors.

The yuan has fallen 3 per­cent against the dol­lar since the eve of the de­val­u­a­tion, but that marks only a par­tial re­ver­sal of its gains over the past 12 months, es­pe­cially against cur­ren­cies of ma­jor trad­ing part­ners Ja­pan and the euro zone. Bank of Amer­ica Mer­rill Lynch said on Wed­nes­day the yuan could be al­lowed to de­pre­ci­ate to 6.5 to the dol­lar by the end of this year and 6.9 by end 2016, from around 6.40 now.

The de­val­u­a­tion last week trig­gered falls in other Asian cur­ren­cies such as those of Aus­tralia, New Zealand, In­done­sia, Sin­ga­pore and Tai­wan, fuelling fears of a cur­rency war. On Wed­nes­day, Viet­nam de­val­ued the dong for the third time this year as author­i­ties sought to sup­port a lan­guid ex­port sec­tor fac­ing fresh chal­lenges from the Chi­nese de­val­u­a­tion.

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