16 February 2019
Retail investors account for the majority of the players in the A-share market. Photo: CNSA
Retail investors account for the majority of the players in the A-share market. Photo: CNSA

China needs to extend easing measures to support growth

In the first trading week of the year, the A-share market recorded a 7 percent one-day decline twice.

This article will review the reasons that triggered the market plunge, and its implications.

We think the market plunge was due to nervousness arising from the newly introduced circuit-breaker system rather than any changes in the real economy.

Although China’s manufacturing purchasing managers’ index (PMI) for December was weaker than expected, the market has long priced in continuing weakness in the manufacturing sector.

Meanwhile, we believe the fall in the service PMI in December is a normal correction.

One major reason for market volatility was the expected termination of restrictions on big share sales.

The Chinese securities regulator banned shareholders with stakes over 5 percent from selling their shares during the market turmoil last summer.

Investors worried that once the restriction is lifted, as it was originally scheduled to be early this month, big share sales will affect the market.

The new circuit-breaker system also led to volatility.

After the market fell by 5 percent, investors rushed to sell their shares before another potential halt of trading at the 7 percent market, hastening its occurrence.

Retail investors, who are very sentimental, account for the majority of players in the A-share market.

So, regulators could regain the market’s confidence by canceling the circuit-breaker system and extending the ban on big share sales.

The renminbi’s sharp devaluation also shocked global markets.

Although the central government managed to control the onshore renminbi exchange rate, the spread of rates between that and the offshore exchange rate expanded to a record.

It means offshore investors believe the central bank will allow the renminbi to depreciate further.

But the authorities also made it clear that the reform of the renminbi pricing policy is to avoid overpricing of the onshore renminbi.

As China continues promoting its renminbi internationalization strategy and opening up its capital account, the government should choose between an independent monetary policy and a fixed exchange rate.

Using foreign reserves to intervene in the renminbi exchange rate will consume liquidity for the real economy.

So, China should allow the market, as soon as possible, to have a bigger say in pricing the renminbi.

We believe the rate plunge is not the result of a short-term intervention but a positive signal of China gradually stabilizing the currency.

Renminbi financing is not broadly adopted worldwide. Thus the tension in the Chinese financial system will have limited impact on global markets.

If the renminbi becomes weaker, it will hit investors’ sentiment and cause short-term downward pressure on global markets.

However, we believe that in the medium term, the renminbi will not depreciate further, because only a gradual devaluation of the currency against the US dollar can avoid the overpricing of the renminbi against the currencies of its major trading partners.

In the coming months, the Chinese government is very likely to extend the easing of its monetary policy to support the supply-side reforms and stabilize the economy’s growth.

This article appeared in the Hong Kong Economic Journal on Jan. 18.

Translation by Myssie You

[Chinese version 中文版]

– Contact us at [email protected]


Managing Director, Chief Market Strategist, Asia, J.P. Morgan Asset Management

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