- Equity rout triggers trading halt as regulator calls meeting
- PBOC cuts yuan fixing most since August; foreign reserves sink
The worst start for Chinese markets in two decades showed no signs of letting up after the central bank cut its yuan reference rate by the most since August, sparking a selloff in stocks that forced the $6.6 trillion market to shut early.
China’s CSI 300 Index plunged 7 percent, triggering a full-day trading halt less than 30 minutes into the session and prompting an unscheduled meeting at the securities regulator to assess the turmoil. The onshore yuan weakened to a five-year low as the People’s Bank of China cut its reference rate for an eighth straight day and said foreign-exchange reserves shrank by a record $108 billion in December.
While a weaker yuan would support China’s flagging export sector, it also boosts risks for the nation’s foreign-currency borrowers and heightens speculation that the slowdown in Asia’s biggest economy is deeper than official data suggest. A surprise devaluation in August roiled global markets on concern the move would trigger a currency war and exacerbate deflationary pressures in developed nations. U.S. equity-index futures declined with commodities on Thursday, with billionaire investor George Soros saying China is transferring problems to the rest of the world.
“This is insane,” said Chen Gang, the chief investment officer at Shanghai Heqi Tongyi Asset Management Co., which manages about 300 million yuan ($46 million). “We liquidated all our holdings this morning” after stocks hit stop-loss levels, he said.
China’s equity exchanges closed at 9:59 a.m. local time, just 29 minutes after markets opened, as the CSI 300 extended this year’s decline to 12 percent. Trading was halted for half that time after a 5 percent drop triggered an earlier suspension. China’s markets are normally open from 9:30 a.m. to 3 p.m., with a 90-minute break in the middle.
The new circuit breakers, which also kicked in on Monday, have been criticized by analysts for exacerbating declines as investors scramble to exit positions before getting locked in by the halts. Policy makers need to “gradually explore, gain experience and make adjustment” to the rules, China Securities Regulatory Commission spokesman Deng Ge said in a statement on Tuesday.
The CSRC held an internal meeting to discuss market conditions and the circuit breakers without coming to a decision on policy action, according to a person familiar with the discussions, who declined to be named because he wasn’t authorized to speak publicly. The regulator didn’t immediately respond to requests for comment.
“Circuit breakers aren’t allowing for people to seek a rational vantage point,” said Brett McGonegal, co-chief executive officer of Reorient Group Ltd. in Hong Kong. “Once the 5 percent halt is lifted, the selling frenzy is already queued up.”
Regulators moved to ease one of investors’ concerns on Thursday, imposing a new limit on the amount of stock that major corporate shareholders can sell. That followed intervention by government funds to prop up shares on Tuesday, according to people familiar with the matter.
Authorities are scaling back efforts to let markets have more sway after an end to three months of relative calm on the nation’s equity exchanges. Policy makers went to extreme lengths to support shares in the midst of a $5 trillion rout last summer, including ordering stock purchases by state funds, suspending initial public offerings and allowing trading halts that froze hundreds of mainland-listed shares.
The yuan weakened 0.5 percent to 6.5889 per dollar at 5:02 p.m. local time in Shanghai. The currency rallied from early declines in offshore trading, strengthening 0.3 percent in Hong Kong.
Swings in the offshore rate sowed confusion among analysts about what the central bank is trying to achieve.
“China isn’t communicating its policy intentions in a clear manner,” said Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong. “It’s disappointing that their communication policy is less than transparent.”
The central bank is considering new measures to prevent high volatility in the exchange rate and will continue to intervene in the currency market, according to people familiar with the matter. Measures being considered aim to restrict arbitrage between onshore and offshore rates, the people said. The monetary authority didn’t immediately reply to a fax seeking comment.
The PBOC has been burning through its foreign-exchange reserves to prop up the currency, with the stockpile recording its first-ever annual decline last year, as the central bank sold dollars in both the onshore and offshore markets. The support has been more sporadic since early December after China succeeded in persuading the International Monetary Fund to admit the yuan into its reserves basket.
China said its foreign-exchange reserves dropped to a three-year low of $3.33 trillion at the end of December. Government data next week are forecast to show Chinese exports shrank for a sixth straight month in December. The private Caixin Media and Markit Economics Chinese services gauge fell to a 17-month low, according to a report released Wednesday.
“There have been a lot of concerns lately about the economy, with the data coming in rather soft,” said Gerry Alfonso, a trader at Shenwan Hongyuan Group Co. in Shanghai. “The volatility in the FX market amplifies those macro concerns and that’s clearly not a positive for the stock market.”
Global investors shouldn’t necessarily interpret losses in Chinese markets as a signal that the economy is worsening, according to Bloomberg Intelligence economist Tom Orlik. He said on Wednesday that early data for December point to stabilization and authorities still have room for stimulus.
Chinese shares are falling from some of the most expensive valuations among major markets. Even after this week’s retreat, the median stock on mainland exchanges trades at about 61 times earnings -- more than three times higher than the median multiple of 18 for companies in America’s NYSE Composite Index. The Shanghai Composite, which is dominated by low-priced bank and energy shares, is valued at 16 times on a market-capitalization weighted basis.
Futures on the Standard & Poor’s 500 Index dropped 2.4 percent on Thursday, while the MSCI Asia Pacific Index declined 2 percent. Copper retreated 2.9 percent in London and oil slid 4 percent in New York.
“China has a major adjustment problem,” Soros told an economic forum in Sri Lanka on Thursday. “I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.”
— With assistance by Shidong Zhang, and Jun Luo