Does the right hand know what the left hand is doing?
Markets thrive on transparency and certainty, and China's latest botched attempt to engineer the outcomes it seeks shows that this lesson has yet to be learned.
Regulators continue to grapple with the aftermath of a stock bubble largely of their creation, whose implosion has been prevented from running its full course.
To alleviate some of the stomach-churning volatility that convulsed markets last year, China brought in circuit-breakers that took effect on Monday. So much for the calming influence: The CSI 300 plunged 5 percent that day, triggering a 15-minute halt, and then the full 7 percent that called an early halt to the first day of trading in 2016.
Stocks slumped Monday partly on concern over the expiration of a six-month ban on major investors selling stakes that was due to take effect at the end of this week. The government responded: State funds bought stocks on Tuesday, while the China Securities Regulatory Commission told exchanges to pass the word out that the share-sale ban would remain in force beyond Jan. 8. It was all hands to the pump to shore up confidence.
Clearly, nobody told the People's Bank of China. The central bank cut its reference rate for the yuan by 0.5 percent Thursday morning, triggering panic. The stock reaction was so swift that markets closed for the day only 29 minutes after opening, when the 7 percent decline was reached.
To compound the mixed signals, the yuan reversed a drop of almost 1 percent in the offshore market to trade 0.2 percent higher against the dollar as of late Thursday morning. Sue Trinh, Royal Bank of Canada's head of Asia FX strategy, said the PBOC may have intervened. Meanwhile, the onshore yuan remained 0.57 percent weaker.
Confused? You're not the only one. The cut in the reference rate was the biggest since August, when the yuan dropped the most in two decades after the PBOC lowered the rate by 1.9 percent. That unexpected devaluation sent ripples through global markets and played a part in deflating a China stock bubble that had already started to lose air.
The ban on stock sales was part of regulators' efforts to arrest the declines and put a floor under prices. Small wonder that they felt a sense of ownership for the bull market, having tried so hard to create it. The government had cut trading fees, made it cheaper to open new brokerage accounts, and expanded quotas for foreign investors. Then, just in case anyone hadn't got the message, state-owned media carried a series of articles in August and September 2014 extolling the virtues of stock investing.
All the tinkering has left the CSI 300 a few smidgens above the low it reached in August -- and that's only because the market is closed. Who knows where the index would be if every investor who wanted to sell now were able to do so.
At this stage, the vaunted circuit-breakers are only delaying the inevitable. A better strategy would be for Beijing to pull back, abandon its micro-managing attempts to massage investor investment, and let the markets clear. That would be the basis for a real recovery. Unfortunately, it may also be too much to hope for from a government that equates success with the strength of its own control over events.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story:
Matthew Brooker in Hong Kong at firstname.lastname@example.org
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Paul Sillitoe at email@example.com