Yuan Devaluation Ensues After Disastrous Equity Open

Market Trends - 05/01/2016

2016 began with substantial disappointment after Monday's trading session saw Chinese stocks recording a major drop the likes of which were last seen over the summer with the ripple effect felt across the globe. The slump led to the first triggering of circuit breakers for 2016, with Chinese stocks halted during the session after concerns unfolded regarding the health of the country’s economy.  The reaction circled the globe, sending key equity benchmarks around the world down the most in more than 4-months. Following the decline, China moved quickly to support the system when the market reopened Tuesday, with the People’s Bank of China reportedly inserting $19.9 billion of liquidity into the financial system, marking the highest amount since last summer’s crash. The amount was offered as a seven day reverse repo with an interest rate of 2.25%. Chinese policymakers are eager to restore credibility, especially after the losses over the summer and doldrums during the Monday session which saw $590 billion in market capitalization wiped away during the selloff.

Despite the boost, equities retreated once more after briefly trading in positive territory during the early hours of the session, after investors viewed the intervention as largely unsatisfactory.  Since the summer volatility, the China Securities Regulatory Commission enacted measures designed to prevent volatility such as preventing large investors holding a more than 5.00% in a single stock from selling. With the measures set to expire on January 8th, there remains a founded fear that investors will resume selling, with $185 billion worth of shares meeting the conditions for sale. While this is a substantial risk, there is also speculation the extraordinary measures will be extended.  Additionally, the CSRC is set to more restrictions on share sales by major shareholders and company insiders, a crucial concern for small investors. Economists expect further easing in monetary policy the coming year with more cuts on the lending rate and the required reserve ratio. In the meantime, the Chinese Yuan is trading at the lowest point in the last four years, with a devaluation of up to 15-20% over the course of 2016 possible in response to worsening economic conditions.

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