A woman reacts near a display board showing the plunge in the Shanghai Composite Index at a brokerage in Beijing, China, Thursday, Jan. 7, 2016.
Advertisement
And the yuan’s continued slide since August is impacting other Chinese financial markets.
HONG KONG (AP) – Calm returned Friday to China’s stock markets after a torrid week but underlying reasons for the turmoil remain: a weakening yuan and perceptions China’s leaders are bungling their handling of the economy.
The Chinese have managed a remarkable achievement – for the last 30 years a state controlled and state planned economic miracle that’s seen incomes rise and wealth created on a historical scale.
China’s total reduction a year ago was US$513 billion, its first annual decline, with economic growth expected to have slowed to its lowest pace in a quarter of a century.
Asia’s largest economy announced Thursday that it had suspended its recently implemented circuit-breaker system, which had kicked earlier, allowing just 29 minutes of trading for the day.
A Barclays report said other Asian currencies have borne the brunt of pressure from a weaker yuan.
Europe’s main indices closed with losses of about 2.0 percent Thursday as signs of a dramatic slowdown in powerhouse China put fright into investors about the outlook for the world economy. That weakness is a bigger incentive for Chinese investors to sell shares and move money overseas.
“The intention (of the authorities) to keep the yuan stable should now be seen in the context of the currency index, not the bilateral cross rate versus the USA dollar”.
How much the yuan is worth shouldn’t really have much to do with the stock market.
Friday’s fix was the first time in nine days that the PBOC set the yuan reference rate higher and it helped mainland stock markets recover, with Chinese equities climbing more than 2 percent.
Another sharp drop came on Thursday, when the yuan rate fell to its lowest in about five years. The currency has steadily lost another 2.6 per cent against the USA dollar even after the bank sprung a surprise devaluation of almost 2 per cent in August. That has compounded problems for China’s exporters, who were already facing higher wages at home and a sluggish global economy.
Commodity markets were also in recovery mode. Also, the CFETS yuan exchange rate index against a Bank for International Settlements basket of currencies increased 1.71 percent year-on-year on December 31, while the index against the IMF’s Special Drawing Rights currency basket dropped by 1.16 percent year-on-year at the end of 2015, according to the PBOC statement.
Sources cautioned that the debate over whether and how to depreciate had not yet been settled, especially as depreciation has knock-on risks on other projects, such as increasing the worldwide use of the yuan for trade and investment – which stronger capital controls would reverse.
Advertisement
China’s stock market has skidded this year as the government prepares to remove measures that were introduced last year to prop up share prices following a meltdown in June. In hindsight, that may have been the easy part. “Unfortunately, this sends signals that at least in area of the stock market, policymakers are making big mistakes and are going back and forth and have kind of lost the game on policy”, said Kuijs.
