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 Stocks fell more than 2 percent in early trade, prompting fears that
exchanges were set for a second day of panic selling after a 7
percent dive on Monday set off a new "circuit breaker" mechanism,
suspending trade nation-wide for the first time.
But both the central bank and the stock regulator reacted quickly,
and major indexes recouped most of their initial losses despite a
late afternoon scare.
The People's Bank of China (PBOC) poured nearly $20 billion into
money markets, its largest cash injection since September, and
traders suspected it was using state banks to prop up the yuan at
the same time.
The China Securities Regulatory Commission (CSRC), for its part,
announced it was planning new rules to further restrict share sales
by major stakeholders in listed companies, and said it would further
tweak the circuit breaker mechanism amid criticism that it had
fueled Monday's sell-off.
The blue-chip CSI300 index ended up 0.3 percent at 3,478.78 points
after bouncing in a 4 percent range, while the Shanghai Composite
Index <.SSEC> dipped 0.3 percent to 3,287.71 points.
How long any reprieve will last is still in question.
In a dilemma similar to the U.S. Federal Reserve's recent tapering
of its stimulus program, Beijing is trying to orderly unwind a
massive and unprecedented stock market rescue last summer, while
pressing ahead with reforms to allow markets to have a greater say
in determining the yuan's value.
Its heavy handed approach to the stock market crash and its surprise
devaluation of the yuan in August had called its policymaking into
question and sparked global market volatility.
CONFIDENCE GAME
Keeping China's notoriously volatile and speculative stock markets
stable will be a trick. Some market watchers say the government's
interventions have kept stock valuations excessively high given the
cooling economy and falling profits.
"Today's problem is the legacy of the government's heavy-handed
intervention last year," said Yang Hai, analyst at Kaiyuan
Securities.
"The patient was desperately looking for treatment but took the
wrong medicine that only prolonged the illness."
Government actions have also suppressed trading volume, leaving the
market more susceptible to big price swings, and discouraged foreign
investors who tend to hold stocks longer than hit-and-run local
retail investors.
"We've been waiting for a market drop like this for a long time,"
said Samuel Chien, a partner of Shanghai-based hedge fund manager
BoomTrend Investment Management Co.
"The economy is poor, stock valuation is still high, and the yuan
keeps sliding, showing capital outflows are accelerating. The market
drop is overdue."
Indeed, some retail investors told Reuters said they would steering
clear of stocks after being burned this week.
One 23-year-old from Guangzhou who gave his surname as Hu said he
had bought stocks on Monday afternoon, assuming that the circuit
breaker would never be triggered, only to see it kick in well before
the market close, locking in a 5 percent loss.
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He took advantage of the mild bounce on Tuesday to exit his
position, saying he had "learned a lesson in blood."
YUAN RISK
China is also wrestling with market expectations that it will allow
further depreciation of the yuan, a scenario many traders believe is
inevitable as the economy slows and more investors pull capital out
of the country in search of better returns elsewhere.
Authorities let the yuan weaken 4.7 percent against the dollar last
year, a record yearly loss. It slipped to fresh 4-1/2 year lows on
Monday, which some blamed for aggravating the stock market slump.
While the onshore yuan market has stabilized in response to central
bank blandishments, the offshore yuan continues to price in deeper
discounts; trading at 6.6373 per dollar, 1.7 percent weaker than the
onshore currency.
The gap is so large as to make them effectively different
currencies, increasing risks for companies and traders.
It also increases the likelihood of market-distorting arbitrage
strategies, which the PBOC has shown signs of being concerned about.
It recently moved to suspend foreign banks suspected of implementing
aggressive strategies to profit from the rate difference, and more
enforcement is expected.
If Tuesday's policy-induced market respite proves temporary,
regulators might have to freeze new share offerings again, extend a
ban on certain share sales and keep the "national team" of
brokerages and asset managers on the hook to keep buying and holding
stocks at a loss.
This could entail the postponement of already delayed reforms, such
as moving to a U.S.-style IPO registration system that would reduce
opportunities for corruption and regulatory meddling.
Such an eventuality would further dent confidence in the China
Securities Regulatory Commission and in the wider financial
regulatory framework to manage increasingly complex markets as the
economy slows.
"Further government intervention on a big scale would amount to
injustice in a market whose reputation has already been suffering,"
said Yang of Kaiyuan Securities.
(Additional reporting by Samuel Shen and the Shanghai Newsroom;
Editing by Kim Coghill)
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