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China's stock market chaos: Watch out for these lingering risks

Chinese stocks plummet yet again on Monday (Jan 11) and analysts remain at odds over where the battered stock market is headed. But one thing is for sure: intense market volatility is here to stay.

SINGAPORE: A near 10 per cent slump and two trading halts in a week marked one of the worst starts to a new year that Chinese equity markets have ever seen.

After major indexes nosedived yet again on Monday (Jan 11), analysts remain at odds over where the battered bourses are headed.

But one thing is for sure: the stomach-churning volatility is here to stay.

“The market will be volatile in both directions going forward,” said Audrey Goh, an investment strategist at Standard Chartered Bank in Singapore. “China is a policy-driven market so it will depend a lot on what policy makers do to calm investors and ease worries about growth.”

WHAT HAPPENED

The steep sell-off over the first week of the year, which echoed a drastic market dive that fuelled global turmoil last summer, started with a plunge on the CSI300 index on Monday (Jan 4). This automatically triggered a newly-implemented “circuit breaker” mechanism that was designed to halt trading across the country’s indexes for the day when the blue-chip index slumped 7 per cent. A 15-minute nation-wide suspension was also designed to kick in when the CSI300 index fell 5 per cent.

Another scare unfolded on Thursday (Jan 7) when the circuit breaker again shuttered Chinese share markets a mere 14 minutes and 17 seconds after opening. A sharper-than-expected depreciation in the Chinese yuan, or renminbi, was identified as the prime culprit behind the panic selling which activated the circuit breakers for the second time in four trading sessions.

Authorities soon acted to soothe nerves by issuing rules to restrict big share sales by shareholders of listed companies and ditched the circuit breaker system, which was criticised for amplifying market volatility.

The People’s Bank of China (PBOC) also guided the yuan higher on Friday (Jan 8), calming investors slightly and helping share indexes in China to rebound nearly 2 per cent each. For the week, however, the Shanghai Composite and the CSI300 index lost 10 per cent each while the smaller Shenzhen Composite tumbled 14 per cent.

"Market volatility this week suggests that nobody really knows what the policy is right now, or if the government knows or is capable of implementing the policy even if there is one," said a Jan 8 note from DBS. “The market's message was loud and clear, that more clarity and less flip-flopping is needed going forward.”

As a new trading week begins, analysts say keep an eye on these risk factors:


100 Yuan notes are seen in this illustration picture in Beijing. (Photo: Reuters/Jason Lee)

1. The yuan: China’s daily midpoint fixing at around 9.15 am has become a key event to watch for investors worldwide, after a series of cuts in the currency's value to a five-year low against the dollar last week heightened a sense of nervousness surrounding the world’s second-largest economy.

The PBOC sets a midpoint for the value of the yuan against the US dollar prior to the market open every day, and the yuan is allowed to rise or fall a maximum of 2 per cent relative to the midpoint, also known as the daily fixing.

Analysts say China’s tolerance for a weaker yuan fanned concerns that the mainland economy is in deepening trouble and that the government might be aiming for a competitive devaluation to help its struggling exporters.

Last Friday, the PBOC strengthened its guidance rate for the first time in nine trading days and pledged to carry out "prudent" monetary policy while working to ensure "reasonably abundant liquidity" in the banking system this year.

But, that has done little to dispel fears of a further depreciation in the yuan.

“The renminbi's behaviour over the past week has been difficult to predict. Different signals about (forex) policy have wrong footed market participants and we are wary in believing that an immediate calmness will soon emerge,” HSBC’s analysts, Paul Mackel and Wang Ju, wrote in a report.

“Other considerations to gauge RMB direction will center around official rhetoric, potential regulatory action if speculative activity intensifies, and the relative data pulse between China and the US. We see upward pressure on the USD/RMB persisting over the coming weeks,” they added.

Analysts such as OCBC Bank’s Vasu Menon also expect a weaker Chinese currency amid a stubborn economic slowdown.
“Analysts are looking at 6.80 for the yuan against the US dollar. I wouldn't put it past that level but I think the currency could be headed further south from here,” the vice president of wealth management at OCBC Bank said. “The economy is slowing down and one policy that the government can undertake is to allow the currency to weaken to help its export and manufacturing sectors, which are critical parts of the economy.”

The yuan depreciated 4.7 per cent against the dollar in 2015, and has lost 1.5 per cent since the start of 2016.


China's consumer inflation edged up in December, while producer prices continued to fall. (Photo: AFP)

2. Economic health: Over the weekend, official figures showed Chinese consumer prices picked up slightly in December, but producer prices remained in the doldrums, chalking up declines for the 46th consecutive month.

The inflation figures followed a slew of mixed economic data that highlighted a slower-growing mainland economy, which is expected to register its slowest rate of growth in 25 years in 2015.  

Analysts say extra stimulus will be needed to bolster growth, but volatility in the yuan means the hands of the PBOC are tied when it comes to unveiling additional easing.

“The producer price index (PPI) has been down for over 40 months and people are expecting more stimulus, but with the currency down significantly, more easing from the PBOC may add to further downward pressure of the yuan,” noted Daniel So, a strategist at CMB International Securities in Hong Kong.

Analysts from Citi also expect the timing of interest-rate cuts to be delayed amid ongoing forex volatility, but cuts in the reserve requirement ratio (RRR) will likely “still be pursued to ensure ample liquidity provision and policy support”.

For the week ahead, investors will likely be eyeing trade numbers due on Wednesday (Jan 13).

File photo showing people monitoring a stock trading screen in China. (Photo: AFP)

3. Stock market policies: Policy missteps, particularly in relation to the newly-minted circuit breakers, have been blamed for partly contributing to last week’s massive sell-off.

While authorities have since suspended the mechanism, analysts at research firm Teneo Intelligence said Chinese policymakers will likely continue their “trial and error approach that takes its cues from short-term market events”.

That could spark further uncertainty among China’s retail investors, who make up nearly 80 per cent of the local market, sending markets into further disarray.

“Policymakers have done quite a bit, but I'm not convinced. Markets will continue to keep a close eye on what policymakers do and if retail investors decide to sell further, that’s going to drive the stock market even lower,” OCBC’s Mr Menon said.