China’s government and central bank have stepped in with urgent measures to arrest the steep declines in the country’s stock and currency markets over recent days. The moves come amid growing fears over the health of the world’s second largest economy.
Premier signals greater policy support
In a high level meeting on Monday, Chinese Premier Li Keqiang stressed the need for more forceful measures to stabilize confidence in the country’s capital markets which have seen sharp losses in January. This rare intervention suggests authorities in Beijing are increasingly concerned about the market declines rippling through the broader economy.
The benchmarket Shanghai Composite index has plunged over 15% year-to-date, with Monday’s near 3% loss dragging the index to its lowest point in over 5 months. China’s currency yuan has also weakened over 2% against the US Dollar since mid December.
According to state media reports, policymakers discussed introducing better financial industry policies as well as ramping up fiscal expenditure to lift employment and consumer demand. Premier Li also urged the country’s national banks to ensure adequate market liquidity.
Shanghai Composite Index Performance
2022 Close 3130.24
2023 YTD % Change -15.2%
Current Level (Jan 23) 2650
The pledge for bolder policy easing indicates Beijing is willing to loosen its purse strings to counter the heightened economic headwinds. Growth is already under pressure from the slowdown in global trade as well as recurring Covid outbreaks and lockdowns domestically. The market declines risks dampening consumer and business confidence.
According to analysts, the policy commitments suggest the government stands ready to deploy its full arsenal including interest rate cuts, more infrastructure spending as well as state buying of stocks and bonds if the declines continue.
Emergency moves to curb yuan weakness
Concerns around capital outflows from China’s financial system have also grown with the persistent yuan declines against the dollar, raising worries of a loss of confidence in the currency.
Sources say the country’s major state-owned banks have actively sold dollars and bought yuan in onshore and offshore markets over the last week in a bid to slow the yuan’s slide. Around $3.5 billion was sold just on Monday according to reports.
So far the intervention has helped stabilize the onshore yuan rate. The offshore yuan also climbed from over 2 month lows amid signs Chinese banks continued to sell dollars aggressively even as their US counterparts returned to work after a long weekend. The higher offshore yuan rate suggests traders now expect less depreciation pressure going forward.
USDCNY onshore exchange rate movement
Date Closing Change vs previous day
Jan 20 6.7858 -0.0043
Jan 22 (Mon) 6.7680 -0.0012
Jan 23 (Tue) 6.7530 -0.0015
Apart from suspected central bank action to curb speculation, the improvement may also reflect growing capital inflows into Chinese assets after Monday’s strong government rhetoric promising better growth policies. A senior currency trader remarked “This is not just the spot market catching up with the bounce offshore. It shows authorities are putting up a fight.”
Further supportive measures in pipeline
The State Council or cabinet issued its own statement late on Monday, echoing Premier Li’s pledge to roll out more powerful measures to steady market confidence.
While no direct policy action was announced, analysts broadly expect the financial regulators to relax rules on margin trading to allow investors to leveraged their exposure. Currently strict margin requirements have forced traders to liquidate their holdings during market declines, adding to the selling pressure. “We recommend watching margin financing for signs of easing”, noted BNP Paribas in a report.
Other analysts predict looser monetary settings could be on their way including cutting benchmark lending rates or lowering bank reserve requirements to boost credit flows into the real economy. So far authorities have held off from more aggressive easing given concerns around rising debt levels and speculative activity. However the latest reassuring messages around policy support suggest the restraint on stimulus may be easing.
China Benchmark Lending Rates
1 yr Loan Prime Rate - Current 3.65%
5 yr Loan Prime Rate - Current 4.30%
Bank Reserve Requirement Ratio - Current 11%
Ongoing yuan weakness may also spur the central bank towards more currency intervention according to market watchers. Analysts at ANZ Banking Group estimated Monday’s suspected dollar selling by China’s state banks likely only used up 10% of the nation’s currency warchest. “This shows that the authorities have sufficient ammunition at their disposal” the analysts noted.
Other options include tweaking bank reference rates to guide the yuan higher or directly matching onshore rates closer to steadier offshore levels – which the central bank has deployed during previous bouts of sharp declines.
For now most observers are optimistic the barrage of rhetoric and initial action from policymakers signals sufficient intent to put a floor under recent losses. However further steep falls that start impacting currency confidence may test how far Beijing is willing to go.
“Stabilizing the yuan remains an important objective,” said Commonwealth Bank of Australia’s head of international economics Joseph Capurso. “If depreciation pressures re‐emerge officials might double‐down on verbal jawboning or intervene more aggressively.”
According to latest checks China’s major state banks stood ready for more dollar selling on Tuesday to curb the yuan’s decline. Analysts say they will be keeping a close watch on the relationship between offshore and onshore yuan levels for signs of further suspected intervention.
Any signal that authorities plan to significantly widen China’s growth effort would also reassure markets. “They might end up throwing everything to restore confidence especially if the Shanghai Composite continues to slide” noted one veteran Chinese economy watcher.
For now most commentators appear to broadly welcome the emergence of greater policy activism to combat China’s market tremors. However it remains unclear whether the moves represent a temporary patch or a more permanent shift towards pro‐growth policies for the long run.
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