Hopefully, China’s second trip to the drawing board will be better.
After two nail-biting sessions over the first four trading days of 2016, during which the CSI300 lost 12% and gave up all it made in 2015, Chinese regulators scrapped the newly installed circuit breakers which shut down all trading on the market twice this week. The market responded with a nice bump higher.
The Shanghai Stock Exchange Composite Index climbed 2% to 3,186 and the Shenzhen Stock Exchange Composite Index added 1.1% to 1,979. The CSI 300 Index, whose moves triggered the circuit breakers rose, rose 2% to 3,362. The People’s Bank of China also removed some negative sentiment by lifting its guidance rate on the yuan for the first time in nine trading days.
On Thursday, the central bank set the yuan midpoint rate at 6.5646 per dollar prior to the onshore market open, 0.50% weaker than the previous fix 6.5314. It had been the eight straight day of lower guidance and the biggest drop since August. The move had sent regional currencies and global stock markets into a tailspin.
On Friday, the PBOC set the midpoint rate at 6.5636 per dollar prior to the market open. In spot trade, the yuan opened at 6.5700 and changed hands at 6.5759 in early trade. The spot rate is allowed to trade with a range 2% above or below the official fixing on any given day. The offshore yuan was trading 1.29% away from the onshore spot at 6.662 per dollar.
“The market is back to normal,” Tian Weidong, analyst at Kaiyuan Securities told Reuters. “Investors can buy and sell as they wish. Under the circuit breaker mechanism, the market was suffocated.”
The circuit breakers, instituted in response to the volatility of last summer’s marker rout, were put into effect on Jan. 4. But they’ve come under attack for having triggers that are too narrow. The first one at a 5% decline kicked in too soon, and the second one at 7% was too close the first one. After the first circuit breakers was lifted, investors rushed to sell their shares, guaranteeing the second circuit breakers would be triggered, shutting down the market for a day.
John Woods, Chief Investment Officer, Asia-Pacific, at Credit Suisse’s private bank told Reuters that the turmoil seen this week was likely to be a “short, sharp shock” similar to last summer’s China stocks crash, which ironically first convinced the stocks regulator of the need for a circuit breaker.