Tuesday 25 September 2018

Fear of fear itself hangs over Chinese markets

As for the yuan, there is some concern it is being pushed down for trade war purposes. Photo: REUTERS/File Photo
As for the yuan, there is some concern it is being pushed down for trade war purposes. Photo: REUTERS/File Photo

Pete Sweeney

Chinese markets have much to fear from fear itself. Global angst mostly accounts for a recent 6pc fall in the yuan against the US dollar.

There's little to dread about tumbling Chinese stocks or an uptick in bond defaults. Patience is not one of President Xi Jinping's virtues, though, and panicked intervention by frightened officials is a risk.

In the back of their collective psyches will be the summer of three years ago. In June 2015, the benchmark CSI300 index began a near-50pc plunge as investors unwound highly leveraged positions, erasing some $5trn (€4.3trn) of market value.

Two months later, the central bank shocked currency markets with a 4.5pc weakening of the yuan's official guidance rate over a few days. A surge in capital outflows sharply accelerated the draining of $1trn from China's foreign exchange reserves, complicating attempts to prop up growth.

This latest share swoon of about 15pc will be painful for equity owners, and disappointing for companies hoping to tap markets if securities regulators slow approvals for new listings and placements. There is little economic risk, though. Chinese stock prices rarely affect consumption or investment. Borrowing also has been restrained. The net balance of stock margin loans stands around $136bn (€116bn), less than half the amount outstanding at the 2015 peak, according to Eikon data.

As for the yuan, there is some concern it is being pushed down for trade war purposes. The idea doesn't stack up. Nearly every emerging-market currency is declining. And Bank for International Settlements data suggests the yuan had overheated against its peers, so this cooling realigns it with neighbours. The People's Bank of China has rebuilt hard currency reserves to $3.1trn (€2.66trn): plenty of firepower to hold off a sharper crash. These resets do, however, coincide with rising tensions between Beijing and Washington, and slowing growth thanks to the crackdown on financial risk.

In 2015, officials threw government money at shares, closed down derivatives and arrested "malicious shorters". A return to such ham-fisted measures could derail deleveraging efforts. And for good reason, it also would scare off foreign investors.

(Reuters Breaking Views)

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