World could face months of market aftershocks

BEIJING -- The latest trigger was currency jitters, but Thursday's plunge in Chinese stocks was just one in a series of aftershocks from last year's boom and bust that could shake markets for months to come.

See Full Article

Investor anxiety over economic weakness and a possible glut of unwanted shares flooding the market have complicated Beijing's efforts to withdraw emergency controls imposed after Chinese stock prices collapsed in June.

On Thursday, trading halted for the day after a stock index fell 7 per cent a half-hour into the trading day. It was this week's second daylong suspension after a plunge in prices Monday tripped the same "circuit breakers" that were introduced Jan. 1.

The benchmark Shanghai Composite Index more than doubled between late 2014 and June, then dived 30 per cent. Supported by a multibillion-dollar government intervention, the market rose almost 25 per cent in the final months of 2015, only to collapse in the new year. That left the main index down 15 per cent from its December peak.

Wild price swings could continue through the first half of this year, according to financial analysts. Even after the latest declines, the Shanghai index is up 36 per cent from October 2014.

The turmoil in China triggered a sell-off in Asian and Western stocks. Beijing keeps its markets sealed off from global capital flows, but due to the vast size of China's economy, foreign investors watch them closely and react to volatility.

"The market still is trying to find a bottom, and that takes time," said Chen Yong, a strategist at Lianxun Securities. "The key is to be able to resume normal daily trading, and during that time volatility is inevitable."

The upheaval disrupted the ruling Communist Party's plans to use the stock markets as a tool to make China's state-dominated economy more competitive and productive.

Economic growth fell to a six-year low of 6.9 per cent in the July-September quarter and is forecast by the International Monetary Fund to decline further to 6.3 per cent this year. Monday's stock price plunged was triggered by surveys that showed manufacturing in December was weaker than expected.

The latest bout of selling was fueled by concern Beijing is letting China's yuan weaken too fast against the dollar.

The yuan, also known as the renminbi, has drifted down by 6 per cent against the U.S. currency since the central bank adopted a mechanism in August it said would make the state-set exchange rate more market-oriented.

The yuan's link to the dollar meant it soared as the U.S. currency climbed over the past year, making it overvalued by 10 to 15 per cent against those of other developing countries. But the prospect Beijing would close such a large gap fueled fears it might lead to an outflow of capital, weakening China's economy and reducing the supply of money to support share prices.

Thursday's exchange rate of 6.5646 yuan to the dollar was the lowest since March 2011.

"The government hopes to see the yuan depreciate to stimulate exports and the economy, but the speed of depreciation went too fast," said analyst Zhang Gang of Central China Securities.

The White House said the U.S. was closely monitoring China's currency. White House spokesman Josh Earnest said the U.S. approach to the uncertainty was to continue pressing China to speed up the pace of economic reforms he said would benefit China long-term and help the global economy.

Investors also were skittish about the impending end Thursday of a six-month ban on share sales by any stockholder who owns more than 5 per cent of a company, according to Zhang.

Regulators tried to head off such concern by announcing earlier in the week major shareholders could sell only in private transactions to avoid flooding the market. After Thursday's market plunge, the securities agency tightened that restriction by saying they can unload only the equivalent of 1 per cent of a company's shares over the next three months.

"Additional volatility in China's stock market remains almost certain in the first half of 2016," said economist Brian Jackson of IHS Global Insight in a report. "China's stock market reform will remain a messy affair."

Chinese leaders encouraged novice investors to pile into stocks beginning in late 2014. They wanted to raise money for state companies to pay down heavy debt loads and become profit-oriented and competitive. Communist planners also hoped investing would help families save for retirement, easing the pressure on Beijing to pay for pensions and health care.

Those plans went wrong when markets soared faster than Beijing wanted. By May, state media that cheered on higher prices started to mix in appeals for investors to act prudently.

After prices plunged in June, the government banned sales by big shareholders, ordered state companies to buy stock, cut interest rates and cancelled initial public offerings.

The government has yet to say what its intervention cost, but Goldman Sachs has estimated state entities spent 860 billion-900 billion yuan ($135 billion-$140 billion) to buy shares in June and July.

The "circuit breakers" might be adding to volatility instead of dampening it as similar measures do in Japan, Thailand and other Asian markets, economists said. They said the 5 per cent gain or loss in the CSI 300 index that triggers a 15-minute trading suspension and the 7 per cent margin that ends trading for the day might be too low a threshold.

According to IHS, the mechanism would have been tripped 20 times if it had been in place in the final quarter of 2015.

"It's hard to see how the circuit breakers can remain in their current form," said Bernard Aw, a market strategist at investment company IG in Singapore.



Advertisements

Latest Economic News

  • New York fines BNP Paribas $350 million in trading scheme

    Economic CTV News
    New York state regulators have fined French bank BNP Paribas $350 million, alleging bank employees for years manipulated global currency markets to benefit themselves at the expense of their customers. The New York Department of Financial Services said Wednesday that from 2007 to 2013 at least a dozen BNP Paribas traders manipulated the foreign exchange market, using chat rooms and fake trades in currencies including the South African rand, Hungarian forint and Turkish lira. Source
  • Bombardier and U.S. aerospace supplier Triumph settle legal dispute

    Economic CTV News
    MONTREAL -- Bombardier and Triumph have reached a settlement about five months after the U.S. aerospace supplier filed a $455-million lawsuit against the Quebec-based aircraft manufacturer. Details of the settlement announced Wednesday were not disclosed. Source
  • New TD call centre will create 575 jobs in Moncton, N.B., province says

    Economic CTV News
    MONCTON, N.B. -- TD has announced plans for a new call centre in Moncton, N.B., that the provincial government says will create up to 575 full-time jobs. The Toronto-based bank will receive up to $9 million in financial assistance from the government, which says the call centre will add $109-million to the province's GDP over six years. Source
  • Graco recalls My Ride 65 car seats in Canada for restraint defect

    Economic CBC News
    Graco's Canadian division is recalling 1,393 car seats with defective harness restraints. The recall affects certain "My Ride 65" model car seats manufactured between May 14, 2014 and July 30, 2014, according to a safety advisory from Graco. Source
  • OPEC nearing deal to extend oil output cut to March 2018

    Economic CBC News
    OPEC and non-member oil producers moved closer on Wednesday to clinching a deal on extending output cuts by nine months to clear a global stocks overhang and prop up the price of crude. The Organization of the Petroleum Exporting Countries meets in Vienna on Thursday to consider whether to prolong the accord reached in December in which OPEC and 11 non-members agreed to cut oil output by about 1.8 million barrels per day in the first half of 2017. Source
  • Moody's cuts China credit rating over rising debt

    Economic CBC News
    The Moody's ratings agency on Wednesday cut China's credit rating due to surging debt, prompting a protest by Beijing and highlighting challenges faced by communist leaders as they overhaul a slowing economy. The downgrade adds to warnings about China's reliance on credit to propel growth after the 2008 global crisis. Source
  • 'The Bank of Canada is not spooked' : Why the central bank is holding rates steady

    Economic CBC News
    The Bank of Canada kept its benchmark interest rate steady on Wednesday, but signalled that could change once the weak U.S. economy starts to rebound as expected through the latter part of the year. Canada's central bank kept its target for the overnight rate steady at 0.5 per cent on Wednesday, the same level it's been at since the middle of 2015, because the economy isn't showing any signs of needing any more or any less stimulus. Source
  • Ottawa offers $950 million for 'superclusters' to create jobs

    Economic CBC News
    The federal government is spending $950 million to fund an "Innovation Superclusters Initiative" that it says will "create more middle-class jobs and more opportunities for Canadian businesses to grow into globally successful brands." Minister of innovation, science and economic development Navdeep Bains made the announcement at the offices of BlackBerry QNX in Kanata, Ont. Source
  • 'Do you want to get thrown off?': Airlines can prohibit passengers from shooting video

    Economic CTV News
    DALLAS -- Without the shocking video, it's unlikely that the world would have learned or cared about the violent manhandling of a 69-year-old man on a plane last month. The outrage on social media, the mea culpa by an airline CEO, the promise to treat customers better -- none of it would have happened. Source
  • OPEC likely to extend output cuts, but price relief elusive

    Economic CTV News
    VIENNA -- OPEC oil ministers meeting this week appear damned if they don't extend production cuts -- and only slightly less damned if they do. Ministers of the 13-nation cartel will likely decide to prolong them in an effort to support prices, when they meet Thursday. Source