China’s Once-Wild Markets Turn Tame With Stocks, Currency Steady

  • Shanghai Composite, yuan trade near 60-day moving averages
  • Suspected intervention by authorities keeping assets stable

China’s stocks and currency are going nowhere amid speculation the authorities are seeking to maintain stability in the nation’s financial markets before a string of key events.

The Shanghai Composite Index and the yuan are trading near their average level for the past two months, while volatility in both has fallen to the lowest since at least February. Wednesday sees highly anticipated decisions by central banks in Japan and the U.S., the yuan will join the International Monetary Fund’s basket of reserve currencies on Oct. 1, and public holidays will shutter China’s markets for the whole first week of October.

"State intervention makes the market less speculative now," said Dai Ming, a fund manager at Hengsheng Asset Management Co. in Shanghai. "With the U.S. entering a cycle of interest-rate increases, the pressure for the yuan and the stock market to decline is building up."

While China’s stock market is not alone in experiencing muted trading, the subdued nature of the nation’s shares follows extreme intervention by policy makers to stabilize the market in the wake of last year’s $5 trillion rout. Narrowing price swings in the currency contrast with turbulence in yuan funding costs in Hong Kong, which surged on Monday amid speculation the People’s Bank of China is mopping up liquidity to boost the exchange rate. The PBOC said on Tuesday that the speculation wasn’t accurate.

BOJ Meeting

The Shanghai Composite added 0.1 percent at the close. Combined turnover on China’s two equity exchanges declined to 697 billion yuan ($105 billion) in the previous two days, the lowest in six months, according to data compiled by Bloomberg. The Hang Seng Index gained 0.6 percent in Hong Kong. The yuan was little changed in Shanghai.

The BOJ On Wednesday shifted the focus of its monetary stimulus program Wednesday, seeking greater flexibility to manage its side effects while strengthening its commitment to stoking inflation over the longer term. All but four of 102 economists surveyed by Bloomberg predict the U.S. Federal Reserve will hold off from raising interest rates at its meeting the same day.

Renewed Pressure

"Traders are not willing do any trades at this point, because the market wants to wait for news from the Fed while there’s limited expectation that China would make any major moves now," said Banny Lam, head of research at CEB International Investment Ltd. in Hong Kong. Fed Chair Janet Yellen’s "comments will likely lean towards the hawkish side, as the U.S. economy has been doing well lately, and that will lead to a renewed round of pressures for the yuan and China stocks," he said.

The Shanghai Composite has fallen 15 percent this year to be among the world’s worst performers, while the yuan has lost 2.7 percent, Asia’s biggest decline.

The overnight cost to borrow the offshore yuan in Hong Kong jumped the most since January to 23.7 percent on Monday, raising speculation that China’s central bank intervened to fend off bearish bets. The funding cost dropped to 3.9 percent on Wednesday.

On the mainland, the cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, rose 2 basis points to 2.56 percent. That’s the highest since June. The seven-day repurchase rate, a gauge of interbank funding availability, gained 8 basis points to 2.52 percent, weighted average prices from the National Interbank Funding Center show. The yield on 10-year sovereign bonds increased one basis point to 2.76 percent on Wednesday.

— With assistance by Tian Chen, and Shidong Zhang

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