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China's Freeze Of Trading In Mainland Shares This Week - Wealth Management Reactions
Tom Burroughes
8 January 2016
(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. 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.
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.
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 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.