Chinese stocks pushed higher in early trade on Friday (Jan 8), a day after nation-wide trading ceased less than half an hour after opening, as a 7 per cent dive set off a circuit breaker mechanism for the second time this week.
The blue-chip CSI300 index, which the newly-introduced circuit breaker is tied to, traded 2.8 per cent at 3,384.0 points as of 1.10 pm local time. The Shanghai Composite rose 2.8 per cent at 3,212.9 points, while the smaller Shenzhen Composite advanced 1.7 per cent at 1,990.0 points.
In Hong Kong, the benchmark Hang Seng index rallied 1.2 per cent to 20,561.25 points in early trade, entering positive territory after four days of heavy losses.
Prior to the market open, the People’s Bank of China (PBOC) set the midpoint rate at 6.5636 per dollar, slightly firmer than the previous fix of 6.5646, and firmer than the previous day's closing quote 6.5929. This was the first time in nine trading days that the central bank had strengthened its official rate, allowing the Chinese yuan to firm in early trade.
“The key thing for trade in China and globally today is the currency,” IG’s market analyst Angus Nicholson said. “No influence from the CNY fixing will give some reassurance to investors.”
The yuan was a key contributor of Thursday’s market turmoil, after the Chinese central bank set the guidance rate to its weakest since March 2011, allowing the biggest one-day fall in the yuan since last August. Analysts said investors took it as a sign of economic weakness and further devaluation to come.
Meanwhile, sentiment was likely helped by two announcements made on Thursday, following the early closure of trading on China’s major stock exchanges.
The China Securities Regulatory Commission (CSRC) issued rules to restrict share sales by listed companies' major shareholders, and announced the suspension of the circuit breaker system later in the day.
Analysts said Beijing's introduction of the circuit breaker mechanism had proved counter-productive as the suspension in trade unnerved investors who were worried that they would not be able to sell shares they do not want.
While circuit breakers have worked well in many countries, including the US, Korea and Japan, China's "trigger thresholds were too close together", Nomura's China analyst Wendy Liu said in a note dated Jan 5.
"2 trading halts in 4 days have created a lot of fear among investors," Jackson Wong, associate director at Huarong International Securities, said in a telephone interview.
"Even in a bad market, investors need to trade freely. The cancellation of the circuit breaker will allow investors to now wait for the national team. Yesterday's trading halt was too fast even for the national team to enter the market," said the Hong Kong-based analyst, referring to the team of state-owned brokerages and fund management that made large share purchases last year to support the market.
Chinese equities have had a wild ride in the first trading week of 2016. Market turmoil started on Monday, when a surprise 7 per cent plunge in the CSI300 index triggered the newly-implemented circuit breaker which halted trade across the country's major indexes for the first time.
Market watchers have cited a toxic mix of uncertainties for the slump, such as weaker-than-expected manufacturing surveys, a weakening yuan, anxiety over the looming expiry of a share sale ban and panic selling which ensued after the circuit breaker was first activated and trade was suspended for 15 minutes.
Following a volatile session on Tuesday, markets recovered somewhat on Wednesday after local news reports stated that the ban on share sales by major shareholders of listed companies will likely remain in place.
However, a sharper-than-expected depreciation in the yuan delivered another blow on Thursday, shuttering local trade and sending shockwaves across global financial markets.
“Volatility will remain for Chinese stocks throughout the year,” John Petrides, manager director and portfolio manager at Point View Wealth Management, said in an email interview.
“The central bank will continue to offer measures to stabilize the system. If they are successful, Chinese stocks will rally. If contagion sets in, there will be more days throughout the year where trading is halted on the Chinese stock exchanges,” US-based Mr Petrides said.
REST OF ASIA ON EDGE
It was a mixed sight across regional bourses early Friday, Japan's benchmark Nikkei 225 index was last seen 0.2 per cent higher, recouping opening losses after the Chinese central bank announced a firmer daily fixing.
The country's Finance Minister Taro Aso said on Friday that China may find it difficult to continue supporting the yuan, given the record decline in its foreign currency reserves.
Australia's S&P ASX 200 slipped 0.6 per cent, while South Korea's Kospi index fluctuated near the flatline.