BEIJING — China’s stock markets rebounded in volatile trading Friday, after the authorities moved to stabilize the currency, bought shares and suspended a circuit-breaker system that had fueled this week’s panic.
As a degree of confidence trickled back to China, global markets also took heart from the Chinese government’s rescue act.
The CSI 300 Index of shares in Shanghai and Shenzhen closed 2 percent higher, recovering after an early decline. Gains were more modest in other Asian markets but Europe opened reasonably positively and U.S. markets looked set to gain ground, too.
The MSCI Emerging Markets Index climbed just 0.4 percent in Asian trading, but shares in Japan and Australia drifted around 0.4 percent lower. By around 11 a.m. in London, the FTSE-100 and German’s Dax index were both more than 0.4 percent higher, while futures on the Dow Jones Industrials index and Standard and Poor’s 500 were around 0.8 percent up. But the pan-European FTSEurofirst 300 was still on track for its steepest weekly drop since late August, the Reuters news agency reported.
“Given confidence in China’s ability to manage its equity and FX (foreign exchange) markets has been badly damaged, it is not surprising to see a comparatively muted global reaction,” Angus Nicholson, a markets analyst at IG Securities wrote in a client note. “Markets will be waiting to see the Chinese government’s determination to prop up the stock market and the currency into next week before any major recovery is likely to be seen.”
China’s stock markets have had a disastrous start to the year, falling around 12 percent in the week to Thursday, and sending jitters all over the world.
The links between China’s stock market and its economy are very limited, experts say, and the links to the global economy even more tenuous. That means the contagion effect from China’s meltdown ought perhaps to have been more limited, many experts argue.
“People have been importing the panic from China into other markets, even though the financial linkages are really not that strong,” said Brian Jackson, China economist at IHS Global Insight. “The stock market might not do that well in the next few quarters, but it is not going to have a big impact on GDP (gross domestic product) right now.”
Nevertheless, China’s mini-crisis cast its shadow far and wide.
In the United States, the Standard and Poor’s 500 Index has fallen 4.9 percent so far this year, its worst start in data going back to 1928. The MSCI All-Country World Index has tumbled 5.3 percent, with around $4 trillion wiped off the value of global equities in the first four trading days of the year, according to Bloomberg.
Chinese authorities were blamed for fueling panic by introducing a poorly designed circuit breaker system that saw the stock market forced to close early twice this week.
On Thursday night, they announced the system would be suspended.
Thursday’s dramatic 7 percent fall in shares, which occurred in less than half an hour of trading, had been precipitated by a larger-than-expected devaluation in the Chinese currency. On Friday, the central bank fixed its guidance rate for yuan higher for the first time in nine trading days, helping to calm the market.
The Reuters news agency reported that China’s foreign exchange regulator had ordered some banks to limit clients’ dollar purchases in a bid to stem capital outflows, while Bloomberg reported that government funds again entered the market to buy local stocks on Friday.
Regulators also prolonged rules limiting the amount of shares major shareholders can sell in the open market.
“The national team will continue to save the market, the mood of investors has stabilized, and confidence is restored,” said Li Daxiao, an analyst at Yingda Securities in Shenzhen.
But the policy flip-flopping did not impress many people, with ridicule expressed on social media, frustration in the financial markets and confusion bordering on panic among many ordinary retail investors.
“The last four days were pretty terrifying, the half-hour yesterday was the most panicky,” said Wei Wei, an analyst at Huaxi Securities in Shanghai.
“Some investors even doubted if the market would still exist. It was a crisis,” she said. “The ups and downs of the stock market are normal. Investors understand that they depend on their own capabilities to make money. But when both being long and selling short disappeared, what game we suppose to play?”
Last year’s unanticipated currency devaluation, a collapse in the stock market and a heavy-handed rescue program badly dented global confidence in the ability of China’s Communist Party leaders to manage a complex economy and powerful financial markets at a particularly challenging time, when growth is already slowing.
This week’s episode has not done confidence any good.
“Why do the policymakers keep making such stupid mistakes?” asked Bill Bishop in the influential Sinocism newsletter. “Were they never that competent but just looked smart because there was so much low hanging fruit? Is China’s economy such a mess now that they have no good options left?”
Or, Bishop asked, has the policy-making process broken down under a centralization of decision-making under President Xi Jinping – combined with a stress on ideological conformity, a suffocating anti-corruption campaign and an exodus of experienced financial regulators, both to the financial sector and into detention?
These questions are unlikely to be answered any time soon.
There are those, like financial market commentator and former hedge fund manager Jim Cramer who argue that you shouldn’t bet against the Communist Party, because they make the rules, and they will keep changing them until they get it right.
“The rule is very simple — the Communist Party runs the show, and they will do whatever is necessary to keep the balls in the air, and do it longer than anyone here in the West believes possible,” Cramer said Thursday on CNBC’s “Mad Money.”
But others remain cautious. Jackson at IHS said the authorities’ intervention left pent up selling demand frozen in the market. “They might have just kicked the can down the road,” he said.
At Franklin Templeton Investments, renowned fund manager Mark Mobius said volatility was likely to continue this year, not only in China but in other markets too.
“As we see it, there is no question that China should continue to have strong growth this year, but one might say China is facing a bit of a conundrum. On the one hand, the government wants stability, but on the other, it also is striving toward more openness,” he wrote in a blog post. “Going forward it will be difficult for China’s government to maintain control if the goal is for a more open economy.”
In China, experts said that any moves towards further financial market reform, or allowing the stock and currency markets to respond more freely to market forces would only happen very gradually.
“Without carrying out comprehensive studies and having repeated argumentations by various parties, rushing into any reform is not the right thing to do,” said Yi Xianrong,an economics professor at Qingdao University.
But Hu Xingdou, an economist at Beijing Institute of Technology, argued there was a more fundamental reason why very little would change.
“The government should have learned that they should not and could not save the market through intervention. It only led to more bubbles and more manipulation,” he said. “It should improve rule of law, establish related systems for public listing, corporate governance and so forth.”
“But it’s another issue what they can do about it. I think the officials understand it, they are not stupid. But their hands are tied by this system, by vested interests. China’s capital market largely serves state-owned enterprises. Despite all the shortcomings in the stock market, some people may not want to correct it because a small group of people still stand to profit from it.”
The Washington Post’s Liu Liu and Xu Yangjingjing contributed to this report.