Brian Jackson, China Economist, IHS Global Insight
Key points:
- Late on 7 January, the China Securities Regulatory Commission (CSRC) decided to halt implementation of the country’s new circuit-breaker mechanism in the stock markets starting on 8 January.
- The mechanism, which freezes trading for the remainder of the day if the CSI300 falls by more than 7%, was announced in September 2015 and effective from 4 January, although it tripped twice in its first week of the trading year.
- After authorities lifted the most recent freeze today, the CSI300 fell briefly during morning trading but then rebounded to a 2.04% gain, or alternatively is down 5.2% year-on-year.
Significance:
Halting the implementation of a poorly designed policy is welcome, although it will also perpetuate policy implementation uncertainty that is already widespread in China. The circuit-breaker may be gone for now, although it is probable that it will return with a higher threshold. Separately, it is worth considering the origins of the latest rout, generally believed to be weak PMI readings, sharper Yuan depreciation, and concerns about a policy on share freezes expiring.
First, industrial output growth is slowing more quickly than other parts of the economy. This is especially due to a housing glut impacting construction materials demand and weak prices in various mining sectors depressing profits – trends that have been obvious for years – and now appears to have limited scope for a quick and sustained rebound. China’s currency has also been a persistent concern. Since August 2015, China allowed market forces to depreciate its currency, although intervened regularly to reduce the pace of depreciation. Markets widely expected depreciation for quite some time before that, and continue to expect more depreciation going forward.
Finally, most observers have long understood that China’s stock market is immature and thus highly prone to irrational movements, both up and down. Moreover, at the latest by July 2015 the government’s willingness to heavy-handedly intervene in stock market corrections was obvious.
In short, gyrations in China’s stock market should come as no surprise, either this week or in the foreseeable future – again, keeping in mind that the three main factors at play are long-term trends, rather than sudden surprises which cropped up in the first week of 2016. Even more important is that China’s stock market remains a drop in the ocean of China’s economy, and thus should not be taken as the single bellwether of China’s economy.