SINGAPORE: Chinese share markets finished higher amid volatile trade on Tuesday (Jan 12), as the offshore yuan strengthened on the back of suspected state bank intervention.
The CSI300 index of the largest listed companies in Shanghai and Shenzhen closed up 0.7 per cent at 3,215.71 points, after wavering between gains and losses in early trade. The Shanghai Composite index nudged up 0.2 per cent to 3,023.03 points, while the smaller Shenzhen Composite gained 0.8 per cent.
In Hong Kong, the benchmark Hang Seng index turned negative to slip 0.7 per cent by 3 pm local time.
In a bid to stabilize market sentiment, the People's Bank of China (PBOC) set the yuan midpoint fix at 6.5628 against the dollar prior to the market open, a tad higher than Monday's reference point of 6.5626.
“The 9.15 am USD/CNY midpoint fix is now a global bellwether for risk appetite,” a Jan 12 morning note from Citi Research said. “After the fix jumped more than 1 per cent last week, the latest two readings have been much stronger than expected, and along with reports of stronger intervention, have helped calm sentiment somewhat.”
"The third day of ‘stable’ fixes for the yuan looks to have, on the currency side at least, halted the hugely oversold positioning building in the markets," IG's market strategist Evan Lucas said in a note.
"The other positive from the stable yuan fix is that it has seen a closing of the gap between CNH to CNY. It will allow international capital investors looking to either hedge or get exposure to the mainland currency to use CNH as it had been intended," the Melbourne-based strategist added.
On Tuesday, the offshore yuan continued its sharp rise and by late morning had completely eliminated the price gap against the dollar with the onshore yuan. According to Reuters, that could be a move by Beijing to shore up confidence and dampen depreciation expectations by Chinese state banks, which is also sparking increased capital flight.
Meanwhile, the country's State Council has set up a working group, headed by deputy secretary-general Xiao Jie, to prepare for upgrading the cabinet's financial department to bureau level, Reuters citing a source close to the country's leadership.
China's cabinet is set to take on a bigger role in overseeing financial markets, as perceived missteps by existing regulators fuel concerns globally that Beijing may be losing its grip on policy as economic growth cools to its slowest in a quarter of a century.
In the previous session, a late afternoon sell-off led mainland equities down 5 per cent to their lowest levels since September.
Analysts attributed the risk-off sentiment to below-view inflation data released over the weekend. According to data from the National Bureau of Statistics (NBS), China's consumer inflation edged up in the last month of 2015, but the producer price index (PPI) remained stuck in a downtrend, stoking concerns about growing deflation risks in the world's second-largest economy.
Other factors such as the “herd mentality” of mainland retail investors and hedge funds could exacerbate the already-intense volatility present in the Chinese stock markets.
“Trying to understand the day-to-day movement of any stock exchange is hard to do,” John Petrides, manager director and portfolio manager at Point View Wealth Management, said in an email interview. “The Chinese exchanges are relatively immature so institutions and hedge funds could dominate the daily market activity and could whipsaw share prices.”
Last week, major stock exchanges in China witnessed one of their worst starts to a new year, with a near 10 per cent slump and two trading suspensions set off by a newly-minted “circuit breaker” mechanism which has since been scrapped.