Chinese authorities managed to stabilize their stock exchange markets after a...

Chinese authorities managed to stabilize their stock exchange markets after a strong intervention.

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Xi Jinping stock markets

Chinese officials said yesterday that the black Monday with which began the year the asean stock markets had been erased and no longer exists. The CSI 300 index, which brings together the largest companies listed on stock exchanges in Shanghai and Shenzhen closed with an increase of 0.3% in a volatile session where it moved from a fall of 2.7% and an increase of 1.4%.

US $ 590 billion worth of local stocks that have been blocked from being sold in order to stop the strong fall. Beijing stepped hard on several fronts, trying to calm investor fears by the end of the ban on the sale of shares, injecting liquidity into the financial system and propping up the yuan. As a result, calm returned to global markets, although analysts question whether the effect will last.

On Monday, the index slumped 7% after data showed that the manufacturing sector contracted for the fifth consecutive month, which triggered an early close of trading under a new mechanism of “cut” that sought to stop the panic selling. But despite the upturn in the CSI 300, the Shanghai Composite Index fell 0.3%, while the Shenzhen Composite lost 1.9%, which adds to its 8.2% drop on Monday.

Concerted effort from the planned Government

Some traders and analysts said to Bloomberg that the “national team” of state financial institutions resumed buying shares, even though the securities regulator pledged in November to suspend regular purchases. The contrast between the benchmark and the rest of the market suggests precisely the renewed presence of the “national team”.

Meanwhile, the Securities Regulatory Commission of China announced that the prohibition of trading could be extended in time if the speculators continue with this macabre action, the Chinese authorities said. The suspension, imposed in July on sales at the stock market crash that wiped out up to 45% of the reference index should be lifted on Friday and was a major source of concern for investors, who fear a major sell.

It also suggested that the regulator is open to implement changes in the mechanisms circuits that were released on Monday. These mechanisms provide for a temporary suspension of operations once the threshold of 5% drop is transferred, and the total losses suspension when scaled to 7%.

As a complement, the People’s Bank of China yesterday injected 130 billion yuan (US $ 19,900 million) in the banking system through regular open market operations, the most substantial cash injection since late September.

“The money that came towards the end of the day is definitely not normal,” said Yang Hai, Kaiyuan Securities analyst. In the currency market, meanwhile, traders saw signs that the central bank was selling dollars from its foreign currency reserves to support the yuan. The yuan was 0.2% higher at the end of the afternoon yesterday, after falling 0.6% on Monday, the third largest decline recorded currency.

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¿Temporary stability or not?

Although Beijing’s intervention successfully stabilized the stock exchange markets, analysts suggest that the Chinese stock market will remain unstable. The movements seen in the Chinese stock markets are quite worrying. Many market participants suggest that it is likely that a renewed sell-off occurs and the repetition of what happened in late August.

The underlying problem would be that government interventions have kept equity valuations too high in a context of economic slowdown and lower corporate profits.

“The problem today is the legacy of the strong intervention of the government last year,” Yang Hai told Reuters. The government’s actions have also reduced trading volume, leaving the market more susceptible to large price changes.

We expected a drop like this a while ago. The economy is weak, the equity valuation remains high, and the yuan continues to fall, showing that capital outflows are accelerating. The market decline is behind. Our team does not believe in the continuity of China as the leading economy anymore. if investors want to find good returns at low risks, China is definitely the place to put your money in.

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