Yuan On Correction Mode, Chinese Stocks Rebound

Anthony Young | @ |

Chinese markets gained much needed relief rally in Friday’s session, after the Central Bank –People’s Bank of China (PCOB)- lifted circuit-breakers, pegged the Yuan’s rate against US Dollar higher and stopped some regional banks from buying more dollars.

A picture shows the headquarters of the People's Bank of China (PBC or PBOC), the Chinese central bank, in Beijing on August 7, 2011. Standard & Poor's US debt downgrade was a wake-up call for the world, a commentary in a top Chinese state newspaper said on August 7, adding that Asian exporters faced special risks. China is the largest foreign holder of US Treasuries. AFP PHOTO / MARK RALSTON (Photo credit should read MARK RALSTON/AFP/Getty Images)
A picture shows the headquarters of the People’s Bank of China (PBC or PBOC), the Chinese central bank, in Beijing on August 7, 2011. Standard & Poor’s US debt downgrade was a wake-up call for the world, a commentary in a top Chinese state newspaper said on August 7, adding that Asian exporters faced special risks. China is the largest foreign holder of US Treasuries. AFP PHOTO / MARK RALSTON (Photo credit should read MARK RALSTON/AFP/Getty Images)

PCOB’s revised policies on Friday were effective in reigning in the rampant market swings – a pattern that emerged – ever since markets opened in the New Year.

Revised policies

The very first change was exiting the ‘circuit breaker mechanism.’ This was freshly introduced to curtail crash-selling by traders, a phenomenon that occurred whenever the CSI300 dipped below 7%.  On Jan 4 in particular, when the circuit breaker came into effect for the first time, it bungled by stopping trade very early. And in correction it allowed rushed selling, eventually halting all trading. The undecided halting and trading repeated for the second time in the week on Thursday.

The ensuing currency price mayhem drew wide-spread criticism from economists, analysts and investors. There was demand for policy clarity, especially with the extent to which the Yuan would be allowed to drop. In the meanwhile PCOB had also attempted to keep the parity between the offshore Yuan and mainland Yuan so as to aid economic recovery and stem capital outflow from Chinese markets.

Back to Normal

Kaiyuan Securities analysts said that the market is ‘back to normal’ with no regulation on the buying and selling. The market suffocation has ended. Additionally PBOC pegged Yuan higher against US Dollar at 6.5636 a psychological price-point.

Date showing fall in Chinese economic growth, decline in industrial output and drop in export and import have impacted the Chinese markets. With similar dismal economic data expected in next few weeks, PBOC is under pressure to let the Yuan drop sharply by 10 to 15%, since the slow-paced currency fall is impeding development.

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Anthony Young

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