Govt financial meeting triggers stock overreaction

By Yu Xi Source:Global Times Published: 2017/7/18 17:28:39

Experts reassure curbing risks will strengthen market and yuan internationalization

Chinese investors look at a screen displaying prices of shares at a stock brokerage house in Hangzhou, East China's Zhejiang province. Photo: IC

China's stock market and yuan reacted differently to the conclusion of a two-day financial meeting over the weekend. Experts asserted that the meeting will benefit the market in the long run and that any short-term fluctuations should not cause concern. They also noted that the chance of a sharp depreciation of the yuan is slim, while the internationalization of the Chinese currency will be pushed forward in a stable pace.

China's stock market saw declines on Monday, the first trading day after the country concluded a two-day financial work meeting on Saturday, while the yuan currency strengthened against the US dollar.

The benchmark index in Shanghai declined 1.43 percent while the tech-heavy start-up board ChiNext tumbled 5.11 percent to a two and a half year low.

The Shanghai index and ChiNext on Tuesday closed up 0.35 percent and 0.67 percent, respectively, which experts said reflects their views that Monday's drop is just a short-term fluctuation and will not last for long.

The People's Bank of China, the nation's central bank, lifted the central parity rate of the yuan to 6.7562 against the US dollar on Monday, according to the China Foreign Exchange Trade System. The yuan is allowed to rise or fall by 2 percent from the rate it currently stands at in the spot market.

Some investors attribute stock decline to policy messages conveyed from the two-day National Financial Work Conference which ended on Saturday.

The meeting has been held every five years since 1997, which is believed to set the tone for financial reforms in the years that follow.

It's reasonable to say that the stock market and yuan performed differently as messages of deleveraging sent from the meeting indicated that the market is likely to hold up in the short term. Meanwhile, the conference also signaled maintenance of neutral and stable currency policy, experts noted.

It benefits the market for a long term and curbs short-term speculations in the financial sector, Xu Hongcai, deputy chief economist at the China Center for International Economic Exchanges, told the Global Times on Sunday.

During the meeting, three agenda points are usually highlighted, including ensuring the financial sector better serves the real economy, containing financial risks and deepening financial reforms, according to Xinhua News Agency on Saturday.

Unnerved by deleveraging

To contain financial risks, deleveraging is the priority resolution for policymakers. During the two-day meeting, the central authorities urged to continue deleveraging the economy via a prudent monetary policy and to give priority to reducing leveraging in State-owned enterprises.

"The stock market slump is an overreaction to the message of deleveraging," because the negative impact would not last for long, Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, told the Global Times on Monday. 

"Ultimately, deleveraging will benefit the stock market, as speculative capital will withdraw from the market due to the government's strong attitude to curbing financial risks," Zhou said.

Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, echoed this opinion.

"Many listed companies hope to raise funds or get high returns through mergers or private placement in the capital market rather than focusing on their main businesses. Speculative activities like that have disturbed the market," said Dong.

The meeting stressed that finance should return to its origin in order to become a more supportive force for the real economy.

Deleveraging is not an easy thing to do, but should maintain a balance with liquidity growth as credit tightening might increase the financing cost for the real economy, said Dong.

Since 2016, the country has started to retract liquidity in the interbank market.

The transactions in the interbank market usually involve leveraging and contributing a large portion of debt in the financial sector, noted Xu.

Stable yuan

Although the stock market overreacted, the yuan still remains stable.

The central bank on July 4 reaffirmed that China should keep a "stable and neutral" monetary policy for the rest of 2017.

During the two-day financial meeting, the country also called for deepening reform of the exchange rate formation mechanism and for steady facilitation of the yuan's internationalization.

The yuan dropped about 6.5 percent against the dollar in 2016, its biggest annual drop since 1994, according to media reports. But then, the yuan rose 2.4 percent against the dollar in the first half of 2017.

In 2016, the yuan also fell to sixth place among the most used currencies globally, with a market share of 1.67 percent, down from 2.31 percent at the end of 2015, according to Xinhua on Saturday.

Over the past year, the Chinese yuan faced depreciation pressure, so any reforms on the exchange rate formation mechanism might therefore cause further depreciation, said Zhou of Shanghai Academy of Social Sciences.

In the view of Zhou, China should grab the opportunity of further pushing forward reforms on the mechanism as the currency has become stable.

Experts believe that the yuan will maintain stability against the US dollar in the coming years. Also, Zhou noted that the chance of a sharp depreciation of the yuan is slim because the currency is backed by the country's stable economic growth as well as large foreign exchange reserves.

China's foreign exchange reserves rose to $3.057 trillion in June, up 0.11 percent from the end of May, marking a fifth consecutive month of growth, according to a note posted on the website of the State Administration of Foreign Exchange on July 7.

"Two-way fluctuation in the yuan will become normal while domestic reforms proceed," Zhou said.

Uncertainties such as the US Federal Reserves' rate hike, China's growing local government debts and economic slowdown may also continue to weigh on external and internal environments, he noted.

China's GDP increased 6.9 percent year-on-year in the first half of 2017 to about 38.15 trillion yuan ($5.6 trillion), which is above the government's target of 6.5 percent for 2017, reflecting a firming trend.

"A stable economy is beneficial for yuan stability and is good for the internationalization of the currency," said Zhou. 

Activities including continued financial opening-up and improved financial infrastructure will further increase the yuan's position in the world, experts say.

Market forces will play a "decisive role," while the government will not heavily intervene in the foreign exchange market in the future.

The internationalization of the Chinese currency will be pushed forward in a stable pace in the long run, despite a temporary setback in 2016 caused by a volatile exchange rate and capital outflow, according to a report released on Saturday by the International Monetary Institute under the Renmin University of China.

For 2016, the yuan internationalization index, an indicator used by the report, stood at 2.26, down 29.8 percent year-on-year.

The index gauged the internationalization level of the yuan from low to high, ranging from zero to 100.

The latest data for this year is not yet available to the public.

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