26 October 2016
The mainland market reacted very calmly to the renminbi  devaluation. Photo: Reuters
The mainland market reacted very calmly to the renminbi devaluation. Photo: Reuters

Beijing should roll out more stimulus measures to boost A shares

The People’s Bank of China held a press conference to calm investors following the devaluation of the renminbi.

The central bank stressed that it was not embarking on a steady devaluation of the currency, and that the yuan would appreciate again after the wide variance between the spot rate and the daily reference rate has been fixed.

However, foreign investors did not appear to have been fully reassured by PBoC’s remarks, and that could mean accelerated capital outflow.

The yuan devaluation will have a mixed impact on China’s economy. The weaker currency will benefit the export sector, but it would make imported energy and raw materials more expensive.

It would also drive up investment costs for companies that seek growth overseas as well as for Beijing’s “One Belt, One Road” initiative.

Southeast Asian nations are concerned that their exports will become less competitive, while Thailand, South Korea and Japan worry they may see less Chinese travelers.

As China exports deflation to the United States through its lower-priced goods, the devaluation could affect the Federal Reserve’s rate hike schedule.

US-listed Chinese companies have suffered from massive sell-offs following the yuan decline. The Hong Kong market also reacted dramatically.

By contrast, the mainland market has responded very calmly thanks to the “national team”, and was able to recoup losses in the previous two sessions on Thursday.

Nevertheless, most investors continued to wait for clearer signs. Market turnover for Shanghai and Shenzhen declined further to 1.08 trillion yuan (US$168.7 billion).

Stocks related to SOE reform find favor

Meanwhile, stocks related to SOE reform were much sought after.

Market focus has shifted to regional SOE reforms. About a dozen Shanghai stocks touched the daily up-limit.

They include Shanghai Jinjiang International Industrial Investment (600650.CN), Shanghai Yuyuan Tourist Mart (600655.CN), Shanghai Jinqiao Export Processing Zone Development (600639.CN) and Shanghai Electric Power (600021.CN).

Insurance plays under pressure

At least 50 have been killed in the Tianjin port explosion on Thursday. The massive blast, however, has limited impact on the stock market. Tianjin Port (600717.CN) lost 2.14 percent.

The tragic accident would result in huge claims in property and life insurance, which means that insurance plays could take a heavy toll in coming days.

Further easing of monetary policy

The central bank will have to further ease monetary policy amid tight market liquidity.

Analysts said the PBoC is likely to cut interest rates again if foreign exchange reserves are drawn down too quickly.

It has injected a net 5 billion yuan in open market operations this week, and such operations will continue until the exchange rate stabilizes.

An interest rate cut may inject fresh air into China’s stock market, which has already bottomed out under the support of the “national team”.

However, the market has been range-bound amid a lack of catalyst and ample liquidity.

The market will post a rebound if Beijing unveils one or two major policy incentives.

As such, investors could take small bets on stocks that are relevant to Guangdong SOE reforms and collect some plays at low levels.

This article appeared in the Hong Kong Economic Journal on Aug. 14.

Translation by Julie Zhu

[Chinese version中文版]

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a columnist at the Hong Kong Economic Journal

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