Chinese markets remain restless

BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/02

Just four days into the first week of trading this year, Chinese regulatory officials abandoned use of a new automatic circuit-breaker mechanism to deal with excessive intraday volatility after it was found to increase rather than decrease market volatility. In recent days, officials have resorted to older approaches such as limits on share trading to calm the markets. Such measures have done little, however, to dispel stock market uncertainty, and large daily gyrations in share prices can be expected to continue in the near future.

To calm forex markets and reduce depreciation pressure on the yuan, the People’s Bank of China employed the fairly heavy-handed measure of squeezing the availability of offshore yuan (Hong Kong, CNH), thereby driving down the difference in offshore and onshore (Shanghai, CNY) yuan-dollar exchange rates. The measure initially caused offshore yuan market rates to soar at the start of this week (CNH Hibor7D reaching 33 %). While the CNH interest rate fell after Wednesday’s session and the situation on forex markets calmed, China’s slowing growth, deregulation of currency movements and shifting exchange rate policies will keep markets on edge.

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