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 Asian and European stocks were down sharply as U.S. crude sank
beneath $28 a barrel for the first time since 2003, hammering energy
stocks and boosting safe havens. [MKTS/GLOB]
The benchmark Shanghai Composite Index closed down a fraction over 1
percent after a 3.25 percent bounce on Tuesday [.SS], while the
CSI300 index of the largest listed companies in Shanghai and
Shenzhen lost 1.5 percent, having risen 2.95 percent the previous
session.
Tuesday's jump was fueled by expectations that the People's Bank of
China (PBOC) would soon act to loosen monetary policy further after
the latest data confirmed economic growth hit a 25-year low last
year.
The indexes are down 15-16 percent so far in 2016 after a series of
sharp sell-offs.
On Tuesday, the statistics bureau also released weaker-than-expected
readings on industrial output and retail sales for December, while
the Commerce Ministry said on Wednesday that foreign direct
investment fell in the final month of the year, and China's external
trade faced relatively severe pressure in 2016.
A new survey by the American Chamber of Commerce in China showed
that the slowdown is hitting profits at more foreign companies
operating on the mainland, and the vast majority believed China's
growth would fall well short of the central bank's forecasts of 6.8
percent this year.
CURRENCY PRESSURES
Economic concerns have also pressured China's yuan currency, which
is down about 5 percent since August, encouraging a destabilizing
outflow of capital.
The PBOC has acted aggressively to deter speculators from shorting
the yuan. But two surprise devaluation moves from the central bank
in six months and a cooling economy have only reinforced market
expectations of further yuan weakness.
On Wednesday, the PBOC set a firmer midpoint for the currency at
6.5578 per dollar, from which the spot rate can vary by 2 percent.
The spot yuan was barely changed from its previous close, though
offshore the currency was a little weaker, trading nearly 0.4
percent below the onshore rate.
As authorities clamped down on speculative selling of the yuan
offshore, the non-deliverable forwards (NDF) market for the yuan has
become an easier and cheaper alternative for punters.
NDF pricing suggests that toward the end of April, the yuan will
have declined 1.4 percent.
"Essentially, the market is betting on the yuan fixing flatlining
for at least two months and then a big depreciation, just like in
August last year," said a trader in Singapore.
The impact of China's sluggish economy and weak yuan has also hit
Hong Kong, where many international investors place their bets on
China.
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The Hang Seng index closed down 3.8 percent on Wednesday, while the
Hong Kong China Enterprises Index tumbled 4.3 percent. The Hong Kong
dollar fell to an eight-year low against the greenback, ratcheting
up concern that its central bank would have to intervene to maintain
the dollar peg and tighten monetary policy to an already slowing
economy.
HOLIDAY CASH
A raft of new regulations have seen yuan trading volumes fall off
sharply, pulling the gap between its onshore and offshore levels
down from more than 2 percent in the first week of 2016. The gap was
fuelling speculation and capital flight and damaging the credibility
of China's currency management.
Late on Tuesday, the central bank announced it would inject more
than 600 billion yuan ($91 billion) into the banking system to help
ease a liquidity squeeze expected before the long Lunar New Year in
early February.
Such a move is usual before the holidays and stopped well short of
an actual cut in bank reserve requirement ratios (RRR), which would
have freed banks to lend more.
China's woes combined with the slump in commodities to prompt the
International Monetary Fund to cut its global growth forecasts again
on Tuesday. It warned the world's second-largest economy would see
growth of only 6.3 percent in 2016.
The government-backed China Securities Journal reported that Beijing
had the policy space for further easing to support the economy,
including raising deficit spending to around 3 percent of annual
economic output.
"The activity data, the domestic market sell-off and unsettled
global financial markets require macro policies to stay
accommodative for an extended period," wrote David Fernandez, head
of Asia Pacific fixed income research at Barclays, in a note to
clients.
"We continue to look for two, 25 basis-point benchmark rate cuts in
the first half of the year, and maintain our forecast of two RRR
cuts."
(Reporting by Pete Sweeney, Samuel Shen and Shanghai and Beijing
newsrooms; Additional reporting by Saikat Chatterjee and Vidya
Ranganathan; Writing by Wayne Cole and Will Waterman; Editing by Kim
Coghill)
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