By Pete Sweeney and Samuel Shen
China’s fragile stock markets turned lower on Thursday afternoon as oil prices gave up the day’s rally and other Asian markets went into reverse.
With tumbling oil prices indicative of slowing global growth, in which China is playing a central role, the benchmark Shanghai Composite Index was down 1.1 percent in the early afternoon. That followed a morning session of up and down trade, as the market lived up to a reputation for volatility that has been exacerbated by low volumes amid a flight of capital.
The index has slumped more than 16 percent in 2016, as China’s currency has come under pressure and economic indicators have confirmed China’s frail growth rate, putting the world’s second-largest economy at the centre of global investors’ concerns.
The index has found support under the 2,900-point level, however, which could suggest a near-term base is forming.
The CSI300 index of the largest listed companies in Shanghai and Shenzhen was down 1 percent. It has lost more than 15 percent since the beginning of the year.
David Dai, Shanghai-based investor director at Nanhai Fund Management Co, said fears of a prolonged bear market were, nevertheless, overdone.
“With stocks having fallen so much, much of the risk has been priced in and another free-fall is quite unlikely, although the chance of a sustainable rebound is slim,” he said.
The yuan has also had a volatile start to 2016, having depreciated about 5 percent since August.
After jolting global markets by allowing the currency to slide sharply early in January, the People’s Bank of China (PBOC) has kept a steady course for the yuan’s daily midpoint fix in the last two weeks, from which it can vary by up to 2 percent. The Thursday fix was barely changed at 6.5585 per dollar.
“The yuan is under depreciation pressure, but China has the ability to control its pace, and indeed the yuan has already stabilised,” said Dai.
In the spot market, the yuan was at 6.5795, just a few pips softer than Wednesday’s close, while offshore it was 0.5 percent weaker at 6.6115.
The central bank was also generous with liquidity ahead of the Lunar New Year holiday by injecting a net 315 billion yuan ($48 billion) into the banking system for the week to avoid a cash crunch during the long holiday.
It was the biggest weekly injection since January 2014, and came on top of other recent PBOC moves to avert any undue strains in coming weeks. The central bank said on Tuesday it would inject more than 600 billion yuan through various lending facilities.
HONG KONG SPILLOVER
The PBOC has acted aggressively to deter speculators from shorting the yuan, also known as the renminbi (RMB).
On Wednesday, the central bank said it would improve policy coordination to promote economic growth and curb financial risks, though it provided no details on steps or timing.
But two surprise yuan devaluations in six months and a cooling economy have only reinforced market expectations that something will have to give.
Speculators have taken to using the yuan’s cheaper offshore forwards market to wager China will finally devalue the currency around March or April.
Hao Hong, Managing Director at Research BOCOM International, said the consequences of China’s attempts to manage its currency and support its stocks were spilling over into Hong Kong.
“Interventions in mainland assets such as the RMB and A-shares have prevented market price from adjusting towards China’s deteriorating fundamentals, and forced volatility to manifest in Hong Kong assets,” he said.
The Hong Kong dollar fell to its lowest in more than eight years on Wednesday as the market tested the city’s long-standing peg to the U.S. dollar.
Concerns the central bank would have to tighten monetary policy to defend the currency helped send local stocks to their lowest in three-and-a-half years.
Hong Kong’s Hang Seng index also flipped negative in the afternoon, though the Hong Kong dollar was a little firmer on Thursday.