China’s major stock indexes opened higher on Friday (January 8) after Beijing ditched a circuit breaker mechanism that halted trading twice this week when share prices tumbled and had been blamed for exacerbating the market sell-offs.
The People’s Bank of China also raised its guidance rate for the yuan for the first time in nine trading days, having allowed the currency’s biggest fall in five months on Thursday (January 7), sending shivers through regional currencies and global stock markets as investors feared it would trigger competitive devaluations.
Chinese markets have had a turbulent start to 2016, buffeted by the PBOC’s lower yuan fixings against the dollar, two days of stock exchange suspensions, weak factory and service sector surveys and worries about looming share sales by major stakeholders once a ban on such sales expires.
Japan’s Nikkei share average turned positive after the Chinese central bank set the yuan’s midpoint rate higher, with the Nikkei reversing a more than three-month low hit earlier in the morning.
The Nikkei rose 0.4 percent to 17,835.30, recovering from 17,509.64, the lowest since Oct. 1.
The People’s Bank of China set the midpoint rate at 6.5636 per dollar prior to market open, firmer than the previous fix of 6.5646, and firmer than the previous day’s closing quote 6.5929.
South Korean shares recouped sharp early losses and edged down in wobbly trade on Friday morning after news China set yuan higher, while concerns over faltering Chinese economy and North Korea issue continued to unnerve investors.
The Korea Composite Stock Price Index (KOSPI) retreated 0.1 percent to 1,902.95 points as of 0228 GMT, its lowest intraday level since September 8, 2015.
In Hong Kong, Hang Send Index opened up 0.8 percent at 20,491.88 points in the morning session.
Managing Director at Parry International Trading Limited, Gavin Parry, welcomed the news of the deactivation of circuit breaker, even though the mechanism was not a new thing in Asia.
“The fact that they’ve removed these circuit breakers is going to, again, obviously free up the aspect of people to manage their risk profile, and hopefully effectively flush things out of the system. Again, for other markets in the region it’s not a new thing, but these markets are a lot more institutionally inclined, they’re a lot more established, and there’s a lot more education in the markets as well, we’re talking in relation to how they work, and a lot more tools for them to manage risks,” Parry said.
China has recently accelerated the depreciation of the yuan, which some economists take as an indication that Beijing realises it cannot continue to burn through its currency reserves.
Japanese Finance Minister Taro Aso said earlier on Friday (January 8) China might find it difficult to continue supporting the yuan given the record decline in its foreign currency reserves.
In response to Aso’s comments, Parry said while people are expecting a continued trend in the yuan’s depreciation, he believed the People’s Bank of China would not allow continued speculation on that.
“So what we’re seeing now is maybe the sentiment of people going inverse to that and saying, now we’re on a depreciating trend. The PBOC (People’s Bank of China) will need to couple and manage those expectations in conjunction with the capital account. And these kinds of aspects are, I think, what people are talking about offshore is how they’re going to manage that. Are they going to continue to step in, use the FX reserves to basically keep that spread tighter? But ultimately it’s a case, we’ve got to remember the PBOC is not going to allow continued speculation on sentiments of continued trends,” he said.
With the circuit breaker deactivated late on Thursday, the CSI300 index was up 1.7 percent at 3,350.66 points in early trade on Friday, while the Shanghai Composite Index was up 1.5 percent at 3,170.66 points.
The CSI300 had lost around 12 percent in the first four trading days of 2016, giving up all the gains made in 2015.
The circuit breaker, which only came into effect on Jan. 4, came under fire for kicking in too soon with its initial pause in trading and then encouraging a rush to sell before a second trigger halted the day’s trade permanently.
Investors in Shanghai are not so positive with the circuit breaker mechanism.
“(Circuit breaker mechanism) was supposed to protect medium and small investors, but it backfired. So this mechanism does not suit for China, in particular for the current situation. Therefore, it has been suspended immediately,” said Shi, who did not reveal his first name.
Another investor in Shanghai thinks the problem lies in Chinese registration system.
“It has nothing to do with the ‘circuit breaker mechanism’, the problem is registration system. The registration system is not suitable for China. The registration system can’t be implemented in China, it does not suit China. If they still keep doing this, it will damage (Chinese) securities industry and Chinese economy,” said Gao, who did not reveal his first name.
Australian shares fell for a sixth straight session on Friday, headed for their worst start to a year on record, but recovered slightly after China’s exchanges opened higher.
The S&P/ASX 200 index fell as much as 1.4 percent in early trading but recovered briefly when the Shanghai Stock Exchange opened in positive territory. By 0147 GMT, the index was down 42.3 points, or 0.9 percent, at 4,678.0.
The benchmark is down more than 6 percent for the year so far, making for its worst opening week on record.
Reuters
