Banking Crisis
China's Freeze Of Trading In Mainland Shares This Week - Wealth Management Reactions

Chinese stocks have fallen, prompting authorities to slam restrictions on share trading this week - although the "circuit-breaker" system was reportedly suspended today. Here are some reactions.
(This item is updated based on latest developments today.)
Almost exactly a year ago, global markets were rocked by Switzerland’s shock decision – which took out a number of hedge funds – to remove the cap on the Swiss franc against the euro, sending the Swiss franc up sharply. Now, markets have been hit by worries about China. So far this week, Chinese authorities have intervened into the mainland’s stock market on two days. Regulators imposed new limits on share sales in China’s stock markets yesterday after an automatic freeze in trading, prompting widespread complaint from local traders at market interference and policy uncertainty. Today, authorities lifted the circuit breaker system on the stock market; state-controlled funds were said to buy equities, allowing the mainland market to rise.
Earlier this week, the People’s Bank of China, the central bank, cut the daily central parity rate by 50 basis points to 6.5646 yuan per dollar, the weakest rate since March 2011, consistent with market activity that has steadily pushed for depreciation. There was a 24-hour freeze automatically triggered in China’s stock market within 30 minutes of trading the same morning when that happened. The China Securities Regulatory Commission has rolled out new rules that limit investors that hold 5 per cent or more of a company's equity to sales of only 1 per cent of a company’s shares over the coming three months, replacing the 6-month ban on some types of share selling by major investors scheduled to expire on 8 January.
Evidently, there is considerable unease about the direction of Chinese policy. This publication gathered some reactions from wealth managers and other organisations to these actions by China.
Ian Kernohan, economist at Royal London Asset
Management
We believe the lifting of share sales restrictions and currency
depreciation were the major triggers for the New Year fall in
China’s equity market. Share sale restrictions have now been
re-imposed, in an attempt to stabilise the situation. The wealth
impact of share price falls per se should be quite limited, given
the low correlation between share price performance and GDP
growth. House prices have a much greater influence on households
and the main consumer indicators remained strong after the August
stock market sell-off.
Global investors seem to be more concerned about weakness in the yuan, after the introduction of the new basket arrangements last month. At the time, investors were warned to expect greater focus on the basket rather than the dollar cross, however the speed of move against the dollar has surprised. Talk of China exporting deflation has returned, together with "they don’t know what they’re doing" and "they must have seen something bad in the economic data". It is likely that the People's Bank of China intends to keep the yuan stable against the basket, but allow it to fall against a rising US dollar in a Fed-hiking environment. With the economic data likely to be more difficult to read during Q1, thanks to China’s New Year holiday, greater clarity on currency policy will be needed to calm markets.
Alan Lok, capital markets policy, Asia-Pacific, CFA
Institute
We broadly agree with the practicality to have in place a trading
halt mechanism to manage trading activities in times of excessive
volatility. This is particularly true in China, with an ultimate
goal to protect investors. However, the investment industry is
generally concerned about the appropriateness of the design,
given that could determine if the circuit breaker system is a
boon or bane. If the newly implemented circuit breaker mechanism
in China has to be fine-tuned, these are the main principles we
subscribe to: While the circuit breaker could serve as a
market safeguard, it is also disruptive to trading activity and
can slow down the price discovery process. Therefore, it should
only be seen as the last resort to stabilise markets - to
minimise the price (side effect) to be paid during market
interventions. The circuit breaker mechanism needs to be
implemented in a harmonised fashion across exchanges to provide
investors with similar expectations and safeguards on whichever
venue they trade. It would also be ideal if exchanges can
actively publicise the operating mode of the mechanism. Such
disclosure would provide transparency to investors over the
trading environment and the safeguards present.
BNP Paribas Investment Partners
At the start of the year, investors often decide to put their
money to work and so this period is typically positive for risky
assets. Not so this year. A steep decline in Chinese equity
markets which triggered newly installed circuit breakers left its
mark on the rest of the world and reminded investors of the risks
and sensitivities that are out there. The market’s negative
reaction to China’s latest manufacturing PMI looks overdone, in
our view.
Even though we still have a cautious view on emerging market economies in general, we have decided to take profits on the emerging equity underweight that we implemented in mid-November.
These developments should remind investors of a couple of things. Firstly, Chinese equities are volatile and the authorities often struggle to accept this and let market forces do their work. Secondly, the outlook is mixed for the Chinese economy, with cyclical stability in the near term and structural challenges thereafter. Thirdly, China matters to the rest of the world. In our scenario analysis, we have looked at the impact on other countries and regions of a hard landing in China. Economic models generally show a muted effect.
Such models may underestimate the negative impact coming through via the financial markets. China’s equity market plunge sent shockwaves through markets in the US, Europe, Japan and emerging countries. Finally, the steep fall of the Chinese currency is negative for Japan, South Korea and other Asian economies. It could trigger policy reactions, especially in Japan. While the Korean won has also weakened vis-à-vis the dollar, the Japanese yen has strengthened. Prime minister [Shinzo] Abe recently said that Japan is no longer in a deflationary period, so the pressure from the government on the Bank of Japan to stimulate the economy has abated. [BoJ] governor [Haruhiko] Kuroda said this week that the Bank of Japan was ready to take even bolder steps to meet its target of 2 per cent inflation. It is not our base case that the BoJ will step up the pace of quantitative easing, but yen strengthening could be a trigger for the central bank to do so.
Brian Jackson, China economist at IHS Global
Insight
Even after the latest bout of depreciation, IHS Global Insight
forecasts depreciation to continue throughout 2016. Official
expectations seem aligned with that view, given authorities had
recently begun publishing new indices that indicate they will
allow greater decoupling from the US dollar. Still, authorities
remain likely to step in and punctuate rapid drops with stability
or reversals, given their deference to gradualism and willingness
to occasionally punish one-way bets in currency markets.
With regards to the stock market policy: implementation of the circuit breaker mechanism is so far exactly as laid out in policies set out in 2015, and thus is not a “surprise”. That said, its regular tripping indicates the thresholds are currently set too low, when in Q3 2015 the mechanism would have tripped 20 times.
Additional volatility in China’s stock market remains almost certain in the first half of 2016, given expectations of worsening GDP growth and continued downward pressure on the exchange rate, and thus frequent tripping of the circuit breaker or adjustments to stabilising policies should not come as a surprise. For the time being, China’s stock market reform will remain a messy affair, but is not representative of reforms in other parts of the economy.
Dominic Rossi, global CIO for equities at Fidelity
International
Global equity markets are now battling the third wave of
deflation since 2008. The epicentre is not within the developed
world nor the financial system but, this time, within the
developing world and the global manufacturing sector, where
capital allocation has been poor and where overcapacity is rife.
A crisis in emerging currency markets has been flagging these
problems for 18 months. The catalyst, now, is the Chinese yuan
which is working through a necessary readjustment. A lower yuan
will further deflate the demand for commodities and traded goods
generally. A further downside adjustment to potential world
output is now unavoidable.
Amundi
We continue to hold the view that the Chinese economy is
bottoming in a narrow range, and would rather be a stabiliser for
global economy in 2016/2017. Overall, we think PBoC is a late
comer in aggressive monetary easing following the Fed, BoJ and
ECB [European Central Bank] in order, hence this ample liquidity
will support the market in general. However, selling pressure is
high for the market, even though CSRC just released the cap
large holder stake cut at 1 per cent of total within 3 months.
Hence, the market volatility is there along the year.