China gloom continues to ripple

Chinese authorities decided to lift the circuit-breaker policy last week and the People’s Bank of China (PBOC) has guided the yuan reference rate higher by setting the midpoint fix at 6.5626 against the US dollar. That compares with a midpoint of 6.5636 that was fixed last Friday in order to lift sentiment, but to no avail. 

Chinese shares on the mainland and in Hong Kong continued to drop yesterday, with the Shanghai Composite Index tumbling 168 points, or 5.29 per cent, to close at 3,017.99.

The Shenzhen Composite Index plummeted 130.61 points, or 6.6 per cent, to close at 1,848. 

The Stock Exchange of Thailand also took a hit as it dropped 9.68 points, or 0.78 per cent, to close at 1,234.50 yesterday while the Bursa Malaysia index slumped 20.02 points, or 1.21 per cent, to 1,637.59. 

The Jakarta Stock Exchange Composite Index dropped 80.88 points, or 1.78 per cent, to 4,465.4 and Singapore’s Straits Times Index dropped 38.61 points, or 1.40 per cent, to 2,712.62. 

There was almost no movement in the baht yesterday from the Bt36.33 per US dollar on Friday. 

“The reasons [for stock-market declines] are similar to those for last week’s severe drop, which include the concerns surrounding the China slowdown in economic growth …  while the double circuit-breaker [triggers] have tarnished sentiment,” said Somchai Amornthum, executive vice president of the research department at Krungthai Asset Management.

Somchai said China using circuit breakers to suspend markets for 15 minutes for daily declines of 5 per cent was too narrow.

Somchai said he expected no hard landing in China but he was concerned about possible currency wars in the region as he expected the yuan to continue to depreciate in favour of export growth.

He also believes that the onshore yuan could be trading in the range of around 6.9-7 per US dollar as China’s shift towards a consumption-led economy is beginning to hurt its economy more than expected.

However, Usara Wilaipich, a senior economist at Standard Chartered Bank, believes that the PBOC’s decision to guide the yuan reference rate higher is an attempt to lower market volatility.

 She said in the short term the yuan and sentiment would continue to fluctuate but the forecast improvement in economic numbers in the coming quarters were expected to improve market sentiment and contribute to the strengthening of the yuan towards the end of the year.

She expects the yuan to be trading at 6.65 against the greenback by the end of this quarter before strengthening to 6.62 and 6.54 in the second and third quarters respectively and around 6.56 by the end of the year.

“China’s economy was improving in the last two months of last year and its fundamentals are not going to change overnight … so what is happening there now is a market reaction and when the economic numbers begin to stable, things should improve sentiment wise,” she said.

Pimonwan Mahujchariyawong, deputy managing director of Kasikorn Research Centre, said the prolonged downward spiral in China’s market sentiment could affect its domestic consumption but there were no irregularities in China’ economic fundamentals, with the economy continuing to slow down gradually because of a shift in economic policy.

“This coupled with the further drop in commodities prices, which we thought had bottomed out last year, could affect our export-growth prediction [for Thailand] that was given at 2 per cent for this year. But so far we have not seen the money markets’ effect on China’s fundamentals,” she said.

“China’s domestic confidence could be affected if its shares continue to drop throughout the whole of this month or its index drops below last year’s low.” 

China accounts for about 10 per cent of Thailand’s exports.