24 October 2016
The yuan's weakness is prompting caution among Chinese stock market investors. Photo: Bloomberg
The yuan's weakness is prompting caution among Chinese stock market investors. Photo: Bloomberg

Currency concerns weigh on Chinese stocks

China’s stock markets continue to be weighed down by concerns about yuan depreciation. The Shanghai benchmark index slipped 0.5 percent on Thursday amid reduced turnover. Many investors remain on the sidelines.

It appears that Beijing has relaxed its grip over the redback after the IMF announced that it will include the unit into the SDR basket next year. The yuan’s slide has gathered pace with a five-day decline. In onshore trade, the unit shed another 260 points to 6.4422 against the dollar Thursday.

However, a State Administration of Foreign Exchange official has commented that short-term fluctuation does not represent long-term depreciation trend, and stressed that China has over US$500 billion trade surplus and more than US$100 billion foreign direct investment.

Given the nation’s robust economic growth, there is no basis for long-term depreciation of the currency, the official added.

It is not the first time that mainland officials have made such remarks. This reminds me of comments made earlier by Chinese authorities, following an overhaul of the foreign exchange regime in 2005, that the yuan would not appreciate.

However, the redback has surged more than 35 percent against the dollar by early 2014, and the Chinese currency is still up more than 25 percent despite the weakness in recent past.

Investors should not take official remarks too seriously. The market will determine how the currency moves in the future as Beijing eases its grip over the foreign exchange regime.

The Chinese unit will continue to face modest depreciation pressure in the short term. That could accelerate capital outflow and be a drag for the stock market.

Combined daily turnover on Shanghai and Shenzhen stock exchanges has fallen from over 1 trillion yuan to current levels of around 700 billion yuan. Liquidity is key to drive up the market.

While sentiment remains fragile, information technology stocks have however outperformed. On Thursday, the sector posted a gain of 1.42 percent.

Inspur Software Co. (600756.CN) hit the daily up-limit, while China National Software &Service (600536.CN) soared 5 percent, Dr Peng Telecom & Media (600804.CN) gained 4.4 percent and Shenzhen Kingdom Sci-Tech Co. (600446.CN) rose 3.5 percent.

Pharmaceutical stocks have fared well. Ginwa Enterprise (600080.CN) hit the daily up-limit, while Joincare Pharmaceutical Group Industry (600380.CN) gained 7.5 percent.

Chinese billionaire Guo Guangchang, who is the chairman of private-sector conglomerate Fosun Group, has gone missing, media reports surfaced after market close Thursday.

It remains unclear whether the tycoon is under investigation by authorities.

Past experience shows that any leadership reshuffle in state-owned companies has limited real impact on company operations as new leaders will take over the helm. However, things are far more complex in private companies.

An investigation into a top boss may have far-reaching impact on his firms.

Guo has built a business empire over the years with many listed companies, including Fosun International (00656.HK), Shanghai Fosun Pharmaceutical Group (02196.HK, 600196.CN) and Shanghai Yuyuan Tourist Mart (600655.CN).

The Fosun Group also indirectly holds nearly 30 percent stake in Sinopharm Group (01099.CN).

Until the situation becomes clear on Guo, share prices of all the firms associated with him will remain subdued.

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a columnist at the Hong Kong Economic Journal

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