Buy-side blames policymakers for Chinese volatility

As Chinese traders compose themselves after last week's wild swings, The Trade Asia asks the buy-side who was to blame and what should market participants expect next?

Buy-siders have wagged their fingers at Chinese regulators for creating widespread volatility to equity and currency markets since the beginning of the year.

Falls in the Chinese equity and currency markets at the beginning of this month may have given some market participants a distorted picture of the Chinese economy, according to buy-side reports released this week.

On Monday 4 January 2016, the CSI 300 index – which is comprised of the top 300 traded stocks on the Shanghai and Shenzhen stock exchanges - fell by 5%, triggering a 15-minute break.

On Thursday 7 January the index fell by 7%, leading to the China’s Securities and Regulatory Commission’s circuit-breaker system kicking in and ending trading after a mere 29 minutes.

By the Friday of that week CSRC later said it was going to suspend the circuit breaker mechanism all together.

Schroders’ Craig Botham says that the assumption by some commentators at the time suggested that the trading volatility was linked to equity weakness was actually incorrect.

He explains “A more obvious trigger (for the sell off) was the forthcoming expiration that Friday of a ban on sales by large stakeholders.”

Since then, Chinese media have reported that the ban on large share sales will now remain in place for the immediate future.

BNY Mellon Investment Management added to the debate, labelling the Chinese policymakers’ attempts to control stock market behaviour as ‘clumsy’.

BNY’s Simon Cox explained: “Stock market intervention has interacted badly with an embryonic, poorly understood currency policy.”

These views were echoed widely. BlueBay Asset Management took a slightly different view, saying the fears of a ‘hard landing’ for the Chinese economy stemmed from the heavily-indebted corporate sector which was struggling with declining profits and spare capacity.

David Riley, head of credit strategy at BlueBay, said: “The success – or otherwise – of Chinese policymakers’ efforts to engineer an orderly debt deleveraging of the corporate sector will determine whether China will avoid a hard landing and financial crash that would be felt around the world.”