What to expect from Chinese stocks after circuit breakers were suspended
A circuit-breaker system put in place to avert panic turned out to do exactly the opposite for China. So, the China Securities Regulatory Commission threw in the towel Thursday and suspended the policy after just four days in use.
“The suspension was meant to remove some of the panic we saw today and on Monday. However, it doesn’t remove the underlying fear investors have about China, especially the currency devaluations and the commodity movements.”
“And it doesn’t guarantee Chinese investors feel more comfortable tomorrow morning,” he said.
Since the circuit breakers were put in place on Monday they’ve been met with criticism and concern. A key issue is that Beijing is afraid to let its perceived overvalued stock market adjust and instead has been trying to regulate its way out of a potential market crash. But as seen this week, the policy has only fueled more volatility and panic, because it incentivizes traders to dump shares right when the selloff kicks in, to beat the market shutdown.
What’s more, the market isn’t given a chance to rebound later in the session and “suddenly you have these panicky headlines,” said Esty Dwek, global strategist at Loomis, Sayles & Company.
“It feeds into a vicious circle and instead of reducing volatility it adds to these fears about China,” Dwek said. “Because people start to think: Is this representative of growth? Does this mean the renminbi is going to collapse?”.
Now, the big question left for Friday’s trade is how traders in China will greet the news.
At this point, the jury is still out.
Dwek agreed that markets were unlikely to bounce back on Friday just because the circuit breakers were suspended.
While the move is considered positive news, the inconsistent measures mean investors are losing confidence in the Chinese authorities, she said.
“[China is] looking a little panicked. It’s not fantastic that you launch new measures and then you have to stop them a week in. I think the fact that they are trying to come up with all these measures makes them look a little desperate, and that’s probably the bigger concern,” she said.
MarketWatch
AJX Price at posting:
83.0¢ Sentiment: Buy Disclosure: Held
