PBOC Does It Again: Zhou's Five-Month-Old Speech Whipsaws Stocksby and
Confusion on timing of Zhou comments sparked a rally in shares
Start date of Shenzhen-Hong Kong stock link is still unclear
Another surprise from the People’s Bank of China is causing headaches for investors.
Less than three months after its sudden yuan devaluation roiled global markets, the central bank sowed confusion among stock traders by presenting five-month-old comments from governor Zhou Xiaochuan as if they were fresh in an article on the PBOC’s website Tuesday.
Like any statement from a central bank official, the timing was critical. In the article, Zhou said the Shenzhen-Hong Kong bourse link would start this year -- a positive surprise for investors who had anticipated China’s $5 trillion equity rout would delay plans to open up the nation’s second-largest stock market. Share prices in Shenzhen surged in response, while Hong Kong Exchanges & Clearing Ltd. jumped as much as 9.1 percent.
The problem -- as the PBOC later clarified in a text message to media -- was that Zhou’s comments on the link were pulled from a May 27 speech. That was before the crash in Chinese shares made a delay of the program more likely. While it’s still unclear whether Zhou intended to reiterate his expectation for the start date, the episode is a reminder to CLSA Ltd. strategist Francis Cheung that the central bank needs to improve its communication as China integrates its markets with the world.
“Such a mix up from a central bank should never happen as it moves markets,” said Cheung, the head of China strategy at CLSA in Hong Kong. “The PBOC should have very clear and specific policies on communications.”
HKEx shares pared their gains by about half after the PBOC clarification, while the Hang Seng Index trimmed its advance to 2.1 percent from 3.4 percent. The Shenzhen Composite Index ended the day with a 5.1 percent rally, as traders pegged the increase to both speculation over the timing of the link and optimism that China’s next five-year plan for the economy will produce a more sustainable expansion.
Official indications of when the Shenzhen connect will start are closely watched by investors in part because the cross-border program is a milestone in China’s effort to reform its financial markets and boost use of the yuan. MSCI Inc. has said that giving foreigners greater access to Shenzhen is key to including the nation’s stocks in global benchmark indexes.
China’s historically opaque approach to economic policy-making leaves markets vulnerable to knee-jerk reactions, said Bernard Aw, a strategist at IG Asia in Singapore.
“The fact that they seldom make public statements breeds more situations where speculation can dramatically affect market movements,” Aw said. “Regular and more frequent communication may be more conducive to stability.”
While this latest episode from the PBOC showed a lack of attention to detail when communicating to investors, the yuan devaluation was an example of policy makers failing to convince the market of their intentions, according to Julian Evans-Pritchard, a China economist at Capital Economics.
The central bank’s surprise move Aug. 11 to change its exchange rate regime, pushing the yuan down the most in two decades, roiled emerging-market currencies and global equities as investors feared a spate of competitive devaluations.
Last month, the PBOC shifted to a new interest-rate regime that gives investors less clarity on which rate the leadership wants to serve as the yardstick for the cost of money. Information about the leadership’s clean-up of local-government debt earlier this year eked out in anonymously-sourced press reports. The central bank didn’t immediately respond to an after-hours request on Wednesday for comment on its communication.
“China’s markets and monetary policy differ from what most investors are accustomed to and are still not well understood by outsiders,” Evans-Pritchard said in an e-mail. “As such, there is an even greater need for clear communication.”
The PBOC isn’t the only central bank with a less-than-perfect track record. The Federal Reserve said it inadvertently released staff projections for interest rates and the economy in June, a disclosure that follows congressional criticism over the Fed’s handling of a leak of internal policy deliberations in 2012. An internal e-mail from the Bank of England on plans to assess the risks of Britain leaving the European Union was accidentally sent to the Guardian newspaper in May.
China’s central bank has made efforts to boost transparency, including with Q&A statements that accompany decisions. The PBOC hired Ma Jun, a former Deutsche Bank AG economist, last year in part to help communicate policy moves to journalists and investors.
Decisions by Chinese authorities are having a greater impact on the rest of the world as the importance of its economy and financial markets increases. The nation accounted for 38 percent of global growth last year, up from 23 percent in 2010, according to Morgan Stanley. Its stock market is the second-largest after the U.S., while the yuan ranked fifth among worldwide currencies in usage for global payments in September.
Once the Shenzhen link starts, international investors will gain access to a $3 trillion market that includes some of China’s most innovative technology and consumer-oriented companies. For now, though, when it will begin is still a mystery. China’s securities regulator said in July that the link will start at the “appropriate” time, without being more specific.
“The actions of Chinese policymakers are being more and more closely watched by the global investment community and are having a growing impact on market volatility,” Evans-Pritchard said. “It is increasingly important that their actions are properly communicated.”