China’s stocks stabilize with yuan amid signs of intervention

The Chinese yuan. (Bloomberg pic)

SHANGHAI: China’s stocks clawed back losses in afternoon trading and the yuan pared its drop after sinking through a key level, as the market reversal and unexpected commentary by the central bank stoked speculation that authorities are stepping up efforts to halt a rout.

The Shanghai Composite Index added 0.4% at the close after earlier plunging as much as 1.9%. The yuan erased declines after sliding through 6.7 per dollar, where traders and analysts had expected intervention from the central bank. Banks and insurers led the equity rebound in Shanghai, which came after shares plumbed a new two-year low to approach levels last seen during panic selling in early 2016.

“It looks like national team buying,” said Steven Leung, Uob Kay Hian (Hong Kong) Ltd. executive director in Hong Kong. “Also, the declines were too much, so there should be some bargain hunting.”

The national team, as China’s state funds are called, have previously stepped in to stabilize the market during routs, or to lift sentiment ahead of important political events. They had appeared absent as the Shanghai gauge fell into a bear market last month.

Worries that a trade dispute with the US will damage an economy already struggling with the effects of a government deleveraging campaign have sent Chinese markets into a tailspin, helping erase $2 trillion from the value of stocks since a January peak. The yuan’s weakness since mid-June, a period in which it’s been the world’s worst-performing major currency, has intensified the selloff.

People’s Bank of China Governor Yi Gang also helped to soothe rattled nerves on Tuesday, reiterating that China will keep the currency stable at an equilibrium level. That, and comments by another PBOC official earlier in the day, are the first clear statement on the currency by the central bank since the yuan slump intensified.

Read more about what Yi Gang said here.

Hong Kong’s Hang Seng Index fell 1.4% as markets reopened after a holiday. The yuan traded at 6.6690 per dollar after earlier falling to 6.7204. Some Chinese major banks sold the dollar in the swaps market, according to four traders. China’s currency has retreated about 4% against the greenback since June 14, the most among 31 major currencies tracked by Bloomberg.

The trade dispute will move up a notch on Friday when the US is set to impose tariffs on US$34 billion of Chinese goods, with another US$16 billion potentially following. The size could increase to another $200 billion of imports if China retaliates.

“Today is only part of a wider market rebound which may or may not be sustainable,” said Liao Zhiming, analyst with Tianfeng Securities Co. “The real test is the Friday, when investors are waiting for the shoe to drop with Trump’s tariffs.”