El-Erian Says Brace for Wildness After China Removes Breaker

El-Erian: Buckle Up, China Could Be a Wild Ride
  • Global equities tumble after turmoil rocks China's markets
  • `Tomorrow is going to be a very volatile day,' he says

China’s decision to suspend a stock circuit breaker makes sense, but the way it is doing it and the timing don’t, said Mohamed El-Erian, the chief economic adviser at Allianz SE.

China realized that it had very tight limits, which did more harm than good, El-Erian said today in an interview with Scarlet Fu on Bloomberg Television.

“They realized this, which is good news. The bad news is they took it off at a very peculiar time and did so without a whole set of compensating measures,” said El-Erian, who is also a columnist for Bloomberg View. “We should tighten our seat belt because I expect tomorrow is going to be a very volatile day in the Chinese markets, as the retail sector tries to exit and government entities try to buy.”

The China Securities Regulatory Commission announced the suspension of a new stock circuit-breaker that forced local exchanges to shut for the second day this week after shares fell 7 percent in intraday trading. The move added to worry that policy makers are struggling with how to contain the months-long turmoil in its financial markets.

Fresh concern that China’s slowdown will hamper global growth has wiped $2.5 trillion off the value of global equities this year, as the nation’s tolerance for a weaker currency is viewed as evidence policy makers are struggling to revive an economy that’s the world’s biggest user of resources. U.S. crude’s tumble toward $30 a barrel heightened fears of disinflation and fueled concern that junk-rated energy producers won’t be able to stay solvent.

U.S. mutual fund and exchange-traded fund investors held about $144 billion in Chinese equities as of Nov. 30, according to an analysis by the Investment Company Institute. That’s a small slice of the overall market, said Brian Reid, ICI’s chief economist.

“The bigger impact is the knock-on effect to other global markets, not the
direct exposure to China by U.S. investors through mutual funds and ETFs,” Reid said.

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