Chinese authorities sought to bring an end to new year stock market turmoil with a dramatic U-turn on a new mechanism that Beijing had hoped would prevent sharp selloffs.
On Thursday, in a tacit admission that the new circuit breakers introduced only this week were having the opposite effect to that intended, China’s main stock exchanges said they were suspending the mechanism. The move came after the breaker was tripped for the second time in a week as the market fell 7% within half an hour of opening.
China’s plunging share prices and the country’s moves to guide its yuan currency lower sent shockwaves around already jittery global markets and, in a dramatic day of trading, £30bn was wiped off the FTSE 100 and oil prices hit fresh multi-year lows. As the UK chancellor, George Osborne, warned against complacency over the recovery, the pound tumbled to a five and a half year low against the dollar.
Stock markets and Brent crude clawed back some ground after China’s circuit breaker announcement, but investors said the mood remained cautious after a torrid start to 2016 that has seen the FTSE 100 fall almost 5% this week and the Dow Jones industrial average in the US shed about 4%. The FTSE closed down almost 2% at 5,954 on Thursday.
Connor Campbell, financial analyst at the Spreadex spread-betting firm, said: “While still pretty dire, the global indices appear to have been briefly calmed … by news that China will be suspending the stock market circuit breaker rule that has wreaked such havoc this week,.
“It seems that investors, for now at least, are taking the news as a positive, the move ostensibly preventing the panic-pause-more panic pattern that appeared in the Chinese markets on Monday and Thursday from repeating itself. That’s the theory, at least; we’ll just have to see how it works in practice.”
The circuit breaker announcement followed a string of ill-fated moves by China to curb volatility on its stock markets and shore up faltering economic growth. Interest-rate cuts, currency interventions and stock market reforms over the past year have failed to restore international confidence in the world’s second-largest economy.
A spokesman for the China Securities Regulatory Commission, said: “The circuit breaker mechanism was not the main reason for the market slump. It just didn’t work as anticipated based on actual situations. The negative effect of the mechanism outweighed its positive effect.”
In a sign of rising concern over flagging exports, China allowed its yuan currency to depreciate further and currencies in neighboring markets also weakened. While stock market moves have little impact on the strength of the real economy, China’s currency moves were more concerning, analysts said.
“Talk of China exporting deflation has returned, together with “they don’t know what they’re doing” and “they must have seen something bad in the economic data””, said Ian Kernohan, an economist at Royal London Asset Management.
“With the economic data likely to be more difficult to read during the first quarter, thanks to China’s New Year holiday, greater clarity on currency policy will be needed to calm markets.”
Courtesy of Guardian News & Media Ltd