- Yuan volatility declines to lowest level since December
- Global contagion from Chinese stock declines is easing
Chinese authorities seem to finally be getting through to investors after months of confusion about the nations’ economic policies helped drive a $9 trillion global equity rout.
Recent moves such as ruling out the possibility of a one-off yuan devaluation, a new head of the securities regulator and an increase in the money available for lending appear to be winning back some confidence. Fresh data on Tuesday showing a further slowdown in the world’s second-largest economy barely made a dent in a broad market rally. Until three weeks ago, such a signal probably would have sparked a selloff.
“We panicked about China for much of this year,” Michael Metcalfe, global head of macro strategy at State Street Global Markets, a unit of the world’s largest money manager for institutions, said on Bloomberg Television on Tuesday. “The market is beginning, just beginning to regain some faith, perhaps, in policy.”
At the start of the year, concern that China’s economy could collapse and its opaque exchange-rate policy haunted investors. The quick succession of recent policy announcements came after calls from around the world for the government to improve its communication.
People’s Bank of China Governor Zhou Xiaochuan, the longest-serving central banker among major economies, led the charge. Breaking months of silence in a Feb. 13 Caixin magazine interview, he said there’s no basis for a continued depreciation of the yuan and dismissed speculation about further capital controls.
At the Group of 20 meeting in Shanghai last week, Zhou and Finance Minister Lou Jiwei pledged to do more to support the economy when necessary, winning kudos from U.S. Treasury Secretary Jacob J. Lew, who said China communicated its policies well. The PBOC lowered the reserve requirement ratio on Feb. 29 for the first time since October to shore up growth.
The results are positive. Stability is returning to the yuan, which had been the epicenter of market tension in recent months. Traders pared back bets on a decline in the currency in the forward contracts, while a measure of investor expectations for price swings retreated to the lowest since December.
The global contagion from the volatile mainland stock markets is fading even as the Shanghai Composite Index extended its decline to 19 percent this year, the most among major benchmarks. The 30-day correlation between the Chinese stock gauge and the Chicago Board Options Exchange Volatility Index, known as the fear gauge, shifted to almost zero from minus 0.4 in January. A negative reading suggests that a drop in China’s A shares coincides with an increase in U.S. equity market price swings.
The Shanghai Composite gained 4.4 percent Wednesday, the biggest advance since November,
“People often think China is like a big black box, where you don’t necessarily know the motivations behind some of the policies,” Brian Jacobsen, chief portfolio strategist at Wells Fargo Advantage Funds, which oversees $242 billion, said from Menomonee Falls, Wisconsin. “The recent changes, the better communications coming out of the PBOC, I view it as very positive.”
Doubt over the strength of China’s economy and the policy response is unlikely to vanish completely as the government struggles with overcapacity in manufacturing, a debt hangover and capital outflows.
Tuesday’s data showed a gauge factory output contracted further in February, while a measure of services fell to the lowest level since December 2008. Moody’s Investors Service lowered China credit-rating outlook to negativethe next day, citing the country’s surging debt burden and questioning the government’s ability to enact reforms.
“This year is going to be back and forth in terms of market reaction and sentiment around China,” said Raman Srivastava, co-deputy chief investment officer in Boston at Standish Mellon Asset Management, which manages about $156 billion in global fixed income assets.
Jonathan Pines, a London-based money manager of emerging markets at Hermes Fund Managers Ltd., concurs. While overweighting Chinese stocks, Pines said he’s hedging against the risks of the yuan weakening for the first time since his $1.5 billion Hermes Asia Ex-Japan Equity Fund started in 2012.
“Volatility is not over,” said Pines, whose fund has returned 12 percent annually over the past three years in dollar terms, beating 98 percent of its competitors. “We don’t know whether China will devalue, but the risk is greater than at any time.”
The outlook for China’s credit ratings was cut to negative from stable on March 2 by Moody’s Investor Service, which cited rising government debt, falling currency reserves and uncertainty over the authorities’ ability to carry out reforms.
For now, investors are encouraged by the renewed stability in China.
China’s stocks will rebound as much as 20 percent in the “short term” as economic growth picks up and yuan volatility decreases, Lirong Xu, the chief investment officer at Franklin Templeton Sealand Fund Management Co., said this week. BlackRock Inc., the world’s largest money manager, said late last month that stability in the yuan has opened a window to buy emerging-market debt.
“Perceptions change from time to time,” said Sam Polyak, an emerging-market manager at Fidelity Management & Research Co. “A big China blowup would be a black swan and a 100-year flood. The market perception of that happening was quite significant at over 50 percent when the reality was 10-20 percent.”