China 2016: An interesting start

Andrew Swan, head of Asian Equities for the Fundamental Equity division of BlackRock’s Alpha Strategies Group, discusses the outlook for Chinese equities in 2016

For eight days in a row starting in December 2015, the People’s Bank of China (PBoC) weakened the yuan reference rate, culminating in a 0.5% devaluation of the currency on 7 January and triggering market sell-offs around the world.

The magnitude of the 0.5% move may look small in absolute terms but it is, in fact, quite significant – it’s the largest one-day move since the sudden devaluation on 11 August 2015, according to Bloomberg data.

In response, the China onshore equity market plunged 7% after the first 30 minutes of trading, halting stock trading for the second time in the first four days since a new ‘circuit breaker’ mechanism had been put into effect. Chinese regulators have since announced a suspension of the circuit breaker mechanism for an indefinite period of time to allow for further study and improvements.

After trading halted, the China Securities Regulatory Commission (CSRC) announced that major shareholders could not sell more than 1% of a company’s shares on the open market within a three-month period starting from 9 January, essentially extending a ban of stock sales by major shareholders that was set to expire last Friday.

The CSRC now also requires major shareholders to disclose any equity disposal plan 15 days in advance.

Where next for the renminbi?

We maintain our view that moderate depreciation against USD will be likely in 2016, but we expect to see broad stability of RMB against a trade-weighted basket of currencies.  We think that the current weakening may be a pre-emptive move to prepare for currency impact related to further Fed rate hikes to come, but view the timing right after the recent A-share weakness as being somewhat unfortunate.

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