Investors panicked today. Shares in Shanghai fell 7 per cent and triggered a market circuit-breaker that halted trading. It was the second time this week.
Two things got them spooked: rising expectations policymakers will allow the renminbi (RMB) to weaken against the US dollar, a move that could destabilise the economy and provoke retaliatory action elsewhere in the region; and concerns over the impact on stock prices when share sale restrictions are lifted by regulators.
The offshore RMB rate (CNH) fell to its weakest level against the dollar since late 2010. The gap between the offshore rate and the onshore RMB rate (CNY) widened at one stage to a record. Trading in Chinese stocks was halted less than an hour after the market opened this morning.
The two issues are separate but they coalesced within the minds of jittery investors to reinforce existing misgivings over the health of the Chinese economy.
However, we still think that RMB weakness is best understood within the context of ongoing currency liberalisation, rather than as evidence of currency devaluation.
China is serious about allowing its currency to trade more freely but the latest moves to relax controls have proven too aggressive for the market.
It hasn’t been a great start to the New Year but there is a risk of over-reacting. China’s transition from an exporter and factory to the world to an economy that’s driven by domestic demand is well known.
It will be a bumpy journey which is why manufacturing data (the Purchasing Managers’ Index or PMI) should be taken with a pinch of salt.
Our view of China remains unchanged, growth is slowing, but we do not anticipate a hard-landing and in terms of companies there are better opportunities outside of the domestic stock market to play the economy’s long-term expansion.
NB. Suspending the suspension: since writing this, the Chinese authorities have suspended the ‘circuit breaker’ mechanism. This will be implemented when trading opens on Friday.