Circuit breaker mechanism deployed to protect economy for second time in a week as China sparks jitters by speeding up devaluation of yuan
China halted the days trading within 30 minutes of opening on Thursday morning as shares plunged by more than 7% triggering an automatic circuit breaker and authorities accelerated the devaluation of the Chinese yuan.
Chinas recently installed circuit breaker mechanism paused trading for 15 minutes after the CSI300 index fell 5% in the first 13 minutes of trading. On resumption of trading it fell further, triggering the days halt.
The CSI300 index finished down 7.2%, the SSE composite index fell 7.3% and Shenzhen dropped by 8.3%.
Christopher Balding, a professor of finance and economics at Peking Universitys HSBC business school, said he expected more government action to halt the stock market drops, whether it is changing the circuit breakers, whether it is again intervening in the market, whether it is extending the ban on large selling by institutions.
Id be surprised if they let this continue going down. By almost any measure, the Chinese stock market is pretty over valued and so you would be looking at a pretty significant fall to get back to a reasonable valuation. I would be surprised if they allowed it to move back to more appropriate levels.
2016 in China is getting off on the wrong foot.
On Thursday Hong Kongs Hang Seng index, which continued to trade, hit its lowest point since July 2013, down by more than 3%.
It was the second time this week that the circuit breaker device, intended to bring stability to the markets, has been deployed.
The stock market turbulence brought back recent memories of when China suffered a humiliating bout of financial chaos that saw the future of the prime minister, Li Keqiang, called into question.
China surprised markets on Thursday by speeding up the devaluation of the yuan to its lowest level in nearly five years.
That unexpected move sent currencies across the region tumbling, as investors feared the Asian giant was kicking off a virtual trade war against its competitors.
The Peoples Bank of China set the official midpoint rate on the currency at 6.5646 yuan per dollar, the lowest since March 2011.
That was 0.5% weaker than the day before and the biggest daily drop since August 2015, when an abrupt near 2% devaluation of the currency also roiled markets.
People are definitely nervous. People are paying a lot of attention to this stuff, whether it is the stock market or the changing currency, said Balding. I think psychologically the currency issue is a bigger issue for Chinese and it is definitely a bigger issue for a lot of firms. Between the two issues there is a lot of worry right now.
The Australian dollar, often used as a liquid proxy for the yuan, swiftly fell half a US cent.
A sustained depreciation in the yuan puts pressure on other Asian countries to devalue their currencies to stay competitive with Chinas massive export machine.
It also makes commodities denominated in US dollars more expensive for Chinese buyers, which could hurt demand and thus further depress commodity prices.
It appears at least initially that the Chinese government is telling the market that they are going to steer the RMB [yuan] closer and they are not going to intervene in the stock market, said Balding. But they have done this before when they dont exactly rush to maintain it and they dont tell people that everything is going to be OK and the market craters for a couple of days and then they step in. So whether or not this maintains through even tomorrow, who really knows?
Patrick Chovanec, a China expert and the chief strategist at New Yorks Silvercrest Asset Management, said the latest bout of stock market turbulence was the 2015 crisis continuing to play out.
To me this isnt what about is happening now in China, it is really a correction that should have happened last summer and they didnt let it happen. It has just been postponed.
The first time [this week] it went down 7%, people pointed to the PMI [Purchasing Mangers Index] number. This time they are pointing to the currency fix. All it takes is a catalyst. When youve got a market where the median value is 65 times earnings and they are trying to prop it up like that something is going to come unglued.
On Chinas unexpected devaluation of the yuan, Chovanec said: It seems like they dont really quite know what they are doing. They had these sudden moves, they said back in the summer that they were not going to devalue, that this was all really about preparing for SDR [special drawing rights] status in the IMF. They seem to have lost control of the narrative when it comes to what their plan is and what their policy is towards the exchange rate.