China Stock Selloff Abates on State Efforts to Stabilize Yuan

UBS's Gao Says China Selloff Not Driven by Fundamentals
  • Offshore yuan climbs to one-week high amid intervention
  • Shanghai Composite's RSI signals oversold conditions

China’s stocks rose in volatile trading after the benchmark index briefly fell below the 3,000 level as policy makers intensified efforts to stabilize the yuan.

The Shanghai Composite Index added 0.2 percent to 3,022.86 at the close, after losing as much as 1.3 percent. Technology and health-care shares led gains. The People’s Bank of China repeatedly intervened in the offshore yuan market on Tuesday, according to people familiar with the matter, following efforts to talk up the currency from two senior government officials on Monday.

After three daily declines of at least 5 percent for the Shanghai index since the start of the year, its relative strength index has fallen to 27 as of Monday, the lowest level since August, and below the 30 threshold signifying oversold conditions. The stocks gauge has slumped 15 percent in 2016, the world’s worst-performing global index, amid speculation policy makers will allow the yuan to weaken and the economic slowdown is deepening.

“I do not recommend investors sell at this level,” Lu Wenjie, equity strategist at UBS Group Inc., said in an interview in Shanghai. “Typically, Chinese policy makers have room to mitigate risks and through such measures, valuations could come back quickly. Current market valuations are quite cheap. It has overly priced in risks.”

The Shanghai gauge trades at 11.8 times estimated 12-month earnings, down from 19 times in June. The MSCI Emerging Markets Index has a multiple of 10.3.

The yuan traded in Hong Kong rose 0.43 percent to 6.5850 a dollar, according to prices compiled by Bloomberg. The currency in Shanghai advanced 0.11 percent to 6.5767, leaving a spread of 0.2 percent. That’s compared with a record 2.9 percent reached last week.

Chinese officials have started to push back against views the nation’s currency is on a one-way weakening path. Betting against the yuan will fail and calls for a large depreciation are “ridiculous” as policy makers are determined to ensure the currency’s stability, Han Jun, the deputy director of China’s office of the central leading group for financial and economic affairs, said at a briefing in New York on Monday.

Investors have misunderstood the PBOC’s intentions in its recent moves on the reference rate, according to Ma Jun, chief economist at the central bank’s research bureau. The fixings are based on the previous day’s closing price and changes to the basket of currencies against which the yuan is valued, Ma said.

The CSI 300 Index rose 0.7 percent, led by technology and health-care stocks. Han’s Laser Technology Industry Group Co. jumped 5.4 percent. Beijing Tongrentang Co. and Shanghai RAAS Blood Products Co. both rallied more than 6 percent.

Defending Stocks

Hong Kong’s Hang Seng China Enterprises Index fell 0.8 percent at the close, while the Hang Seng Index lost 0.9 percent. The Shanghai index’s 10-day volatility hovered around the highest levels since September as trading volumes slipped 11 percent below the 30-day average.

While the government helped boost stocks at least twice last week, according to people familiar with the matter, equities extended declines into the close on Monday. Even if state funds come in to defend the 3,000 level, it may not ultimately work, according to Michael Every, head of financial markets research at Rabobank Group in Hong Kong.

“Everyone rational wants to sell, while everyone official has been told to buy,” said Every. “By throwing good money after bad, it just delays the inevitable.”

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