Chinese shares slump 5% as Beijing tries to reassure markets ahead of G20

The Chinese leadership has tried to reassure other governments and the financial markets that they support more transparent decision-making and understand the impact Beijing’s policies can have on the fragile global economy.

Shares in China and other parts of Asia fell sharply on Thursday as investors waited nervously on the eve of a two-day summit in Shanghai of G20 finance ministers and central bankers expected to discuss the recent market turmoil and global economic slowdown.

Amid continued speculation that China could be forced to devalue the yuan this year, Zhu Guangyao, China’s vice finance minister, said Beijing would seek to keep the exchange rate stable while maintaining its current “managed float” regime.

“We do recognise the risk the global economy faces,” he said at a conference on Thursday held by the Institute of International Finance linked to the G20 summit.

“We also understand how important it is to correctly communicate with the market,” he added.

The Shanghai meeting is already being compared with the G20 meeting in April 2009 when officials agreed on coordinated stimulus to prevent a worldwide depression during the global financial crisis. However, few expect this year’s conference to produce similar results.

“Calls for co-ordinated policy easing ahead of this weekend’s G20 meeting will almost certainly come to nothing,” wrote Andrew Kenningham, senior global economist at Capital Economics in London.

China, however, appears to be positioning itself for aggressive fiscal stimulus, hoping it can migrate its economy away from overdependence on low-end export manufacturing to something more sophisticated without setting off a wave of layoffs.

Zhu also said that China had room to increase its fiscal deficit this year and would take necessary measures to deal with systemic risks while communicating with the market.

According to Bloomberg, he also said that the more fiscal stimulus was needed to kickstart flagging growth in the world economy.

“Countries with room to make fiscal expansion should take action,” Zhu said. “We cannot just rely on monetary policy. Fiscal policy must play a role.”

Such increases would have to be approved by Premier Li Keqiang at the annual meeting of parliament which begins March 5, he said.

Zhu’s comments followed similar remarks earlier in the day at the same conference by the head of the Industrial and Commercial Bank of China (ICBC) Jiang Jianqing, who said there was no market basis for further yuan weakness.

However, similar calls in the past have had little impact in fending off bearish pressure against the currency, with international investors such as George Soros publicly arguing that the currency is set to decline further.

US treasury secretary Jack Lew, in an interview with the Wall Street Journal on Thursday, said China had to make it clear that there was no “major devaluation” in the pipeline.

The People’s Bank of China (PBOC) conducted a surprise one-off devaluation of the official guidance rate in August, which it argued would allow the market to reset at its natural level, but investors have continued to move out of the currency since and the exchange rate has slid further.

In a speech at the Shanghai conference, central bank vice governor Yi Gang said that investors could expect more fluctuations by the yuan against the dollar as the PBOC tried to put more emphasis on measuring the yuan’s value against a basket of currencies.

The equity markets remained under pressure on Thursday with a fall in the oil price refocusing attention on the weakness of the global economy.

The Shanghai Composite index was down more than 5% at 6.30am GMT while the CSI300 index of leading Shanghai and Shenzhen shares was down 4.87%. The Hang Seng in Hong Kong was down 1.48%.

Brent crude for April delivery skidded 1.1% to $34.04 a barrel and US crude fell 0.9% to $31.86 a barrel after Saudi Arabia dampened expectations of a coordinated production cut to shore up prices.

China’s industry ministry said during a separate press conference in Beijing on Thursday that China’s exports and currency remain under pressure, adding the ministry would invest 100 billion yuan ($15 billion) over two years to relocate workers during China’s industrial restructuring.

The onshore currency market remained relatively flat in morning trade after the comments, changing hands at around 6.53 per dollar, having softened around 0.6 percent since markets reopened after a week-long holiday earlier in the month.

The offshore yuan firmed slightly in morning trade but remained weaker than the onshore rate.

[Source:- Gurdian]

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The Shanghai meeting is already being compared with the G20 meeting in April 2009 when officials agreed on coordinated stimulus to prevent a worldwide depression during the global financial crisis. However, few expect this year’s conference to produce similar results.

“Calls for co-ordinated policy easing ahead of this weekend’s G20 meeting will almost certainly come to nothing,” wrote Andrew Kenningham, senior global economist at Capital Economics in London.

China, however, appears to be positioning itself for aggressive fiscal stimulus, hoping it can migrate its economy away from overdependence on low-end export manufacturing to something more sophisticated without setting off a wave of layoffs.

Zhu also said that China had room to increase its fiscal deficit this year and would take necessary measures to deal with systemic risks while communicating with the market.

According to Bloomberg, he also said that the more fiscal stimulus was needed to kickstart flagging growth in the world economy.

“Countries with room to make fiscal expansion should take action,” Zhu said. “We cannot just rely on monetary policy. Fiscal policy must play a role.”

Such increases would have to be approved by Premier Li Keqiang at the annual meeting of parliament which begins March 5, he said.

Zhu’s comments followed similar remarks earlier in the day at the same conference by the head of the Industrial and Commercial Bank of China (ICBC) Jiang Jianqing, who said there was no market basis for further yuan weakness.

However, similar calls in the past have had little impact in fending off bearish pressure against the currency, with international investors such as George Soros publicly arguing that the currency is set to decline further.

US treasury secretary Jack Lew, in an interview with the Wall Street Journal on Thursday, said China had to make it clear that there was no “major devaluation” in the pipeline.

The People’s Bank of China (PBOC) conducted a surprise one-off devaluation of the official guidance rate in August, which it argued would allow the market to reset at its natural level, but investors have continued to move out of the currency since and the exchange rate has slid further.

In a speech at the Shanghai conference, central bank vice governor Yi Gang said that investors could expect more fluctuations by the yuan against the dollar as the PBOC tried to put more emphasis on measuring the yuan’s value against a basket of currencies.

The equity markets remained under pressure on Thursday with a fall in the oil price refocusing attention on the weakness of the global economy.

The Shanghai Composite index was down more than 5% at 6.30am GMT while the CSI300 index of leading Shanghai and Shenzhen shares was down 4.87%. The Hang Seng in Hong Kong was down 1.48%.

Brent crude for April delivery skidded 1.1% to $34.04 a barrel and US crude fell 0.9% to $31.86 a barrel after Saudi Arabia dampened expectations of a coordinated production cut to shore up prices.

China’s industry ministry said during a separate press conference in Beijing on Thursday that China’s exports and currency remain under pressure, adding the ministry would invest 100 billion yuan ($15 billion) over two years to relocate workers during China’s industrial restructuring.

The onshore currency market remained relatively flat in morning trade after the comments, changing hands at around 6.53 per dollar, having softened around 0.6 percent since markets reopened after a week-long holiday earlier in the month.

The offshore yuan firmed slightly in morning trade but remained weaker than the onshore rate.