Tuesday 25 October 2016

China's stock market swings as investors fear Beijing stimulus is over

Peter Spence

Published 19/08/2015 | 10:56

A vendor holds Chinese yuan notes at a market in Beijing
A vendor holds Chinese yuan notes at a market in Beijing

China's stock markets swung wildly on Wednesday as the authorities battled to restore investor confidence.

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Shares on China’s main market - the Shanghai Composite - ended the day 1.2pc higher having earlier plunged by as much as 5pc.

The recovery late in the day was apparently due to state-backed companies gobbling up shares as trading drew to a close.

A turbulent day on the markets reflected concerns that the housing market could be overheating, and that Beijing might stop propping up equity prices.

Since turmoil hit Chinese markets in June, Beijing has sought to correct a sharp fall in share prices by restricting the number of stocks that can be traded and by leaning on state-backed bodies to snap up shares.

An estimated $4 trillion has been wiped off the value of Chinese equities in just three weeks earlier this year, although they are still higher than they were this time a year ago.

In addition, poor economic numbers in the last month have suggested that China's economy is slowing down. Recent data showed that exports fell by 8.3pc in July compared with the same month a year earlier.

Some experts had been expecting China to boost exports in a bid to shore up growth. Beijing's decision to weaken the yuan - also known as the renminbi - last week appeared to support this view, as a weaker currency should make China's exports cheaper.

However, the Commerce Ministry appeared to quash this theory on Wednesday by saying that China’s exports could continue falling in the months to come.

Analysts at Barclays expect that China’s moves will just be the first steps in a larger depreciation of the yuan, which they expect to fall by 6pc against the dollar by the end of the year. The devaluation added to concerns that the world’s second-largest economy is in a more fragile state than official numbers reveal.

Chinese officials are targeting economic growth of 7pc this year, though many China watchers estimate that growth is far more tepid than Beijing’s GDP numbers would suggest. Fears of a “hard landing” for Chinese growth have plagued stocks the world over.

Neil Mellor, a senior currency strategist at BNY Mellon, said that the “devaluation has only compounded the perceived challenges”. He suggested that yuan fixing “reform might well be an ideal pretext to provide a boost to exports as the last recourse for a government that has thrown everything at its economy with little to show for it”.

The volatility in Chinese stocks rippled through Asian bourses on Wednesday, with Hong Kong’s Hang Seng dropping by 1.3pc and Japan’s Nikkei more than 1.6pc weaker as trading closed. The MSCI index of emerging market stocks moved into touching distance of its two-year lows.

Jim Reid, a strategist at Deutsche Bank, said that “improving house price data… [had] dampened some hopes that broader government stimulus is around the corner”. July marked the first month in the last 16 that more Chinese cities saw house prices rise than fall.

Ratings agency Standard & Poor's has said that looser rules on home sales in China have had an "increasingly positive impact" on property prices. With the possibility of a boom in property prices, the authorities will be hesitant to step in, concerned that they could make housing unaffordable.

An announcement by the securities regulator last week that the state-run China Securities Finance Corp would be doing no more to combat daily movements in equities has unnerved investors. “The interventions we saw following the huge slump in Chinese equity markets a month or so ago might now be a more rare occurrence,” Mr Reid said.


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