China: Stabilized at last after government intervention - BBH

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 5, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Research Team at BBH, notes that the Chinese shares and the yuan stabilized with the apparent help of the government's guiding hand, but global markets are still on the defensive.

    Key Quotes

    “The euro has extended yesterday's decline through the $1.08 level. The next immediate technical objective is near $1.0730. The greenback is firmer against most major and emerging market currencies. The chief exception is the Japanese yen. Lower equity prices and the continued pullback in US yields are often associated with a stronger yen. The dollar has thus far remains above yesterday's low against the yen (~JPY118.70), but only just. A new low, albeit marginal, toward JPY118.30, is possible in the North American session, especially if the S&P 500 extends the 10 point decline in electronic trading.

    Chinese officials apparently recognized the need to prevent the stock market weakness from spilling over and fueling expectations of sharp yuan losses. Intervention in the foreign exchange market through state-owned banks has been widely cited. While the onshore yuan stabilized, the offshore yuan has not. The spread between the two is at record levels. Last summer, the IMF urged China to reduce the gap in order to provide a proper hedging market for central banks who chose to put reserves in yuan with it being included (as of later this year) in the SDR.

    Reports also indicated that through a number of state-owned and state-guided entities likely intervened in the equity market as well. The buying would likely have been concentrated among the blue-chips (state-owned banks and industrial combines). This is reflected by the fact that the CSI 300, an index of large companies, managed to eke out a small gain (almost 0.3%), while the Shanghai Composite ended a volatile session off nearly as much and the Shenzhen Composite lost another 1.8% after yesterday's more than 8% drop.

    In addition to the reports of material intervention, officials may tap other levers. For example, the ban on large equity investors selling shares is to expire at the end of the week, and China's key regulator suggested that the ban may be extended. Also, some reports suggest that at least ten companies reported that their executives would not sell their holdings for the next 6-12 months.”
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