Chinese Intervention Produces Volatile Results

Chinese stocks have taken the helm as some of the most volatile globally traded assets with the slowdown in the economy contributing to downside woes in regional equity benchmarks.  The Shanghai Stock Exchange 180 Index has been one of the harder hit indices since peaking in June when optimism and sentiment stood at highs.  Policymakers at the People’s Bank of China were quick to implement measures to stem the outflows but not before permanently denting sentiment and sparking a global ripple effect that spread through asset prices like wildfire.  While the Central Bank is gradually becoming more effective at sustaining equity valuations, results have been mixed, eliciting volatile outcomes.  Continued success is difficult to fathom in light of the considerable headwinds to a brighter outlook.
 

The Fundamental Perspective

No Chinese stocks have been immune from the anxiety that has spread through markets.  Policymakers firmly intent on reducing the impact and restoring confidence in financial markets have largely fallen short of success when it comes to intervention.  A great example would be yesterday’s end of session rally which saw manic buying in the last hour of trading not long after another Yuan devaluation.  While Central Banks are known to participate in equity markets across the globe, nowhere was this more evident than yesterday’s price action where the SSE 180 Index gained 6.63% from the day’s lows to close in positive territory after spending most of the session firmly in the red.  While effective no doubt, the level of intervention raises fears of a step backwards for the Chinese economy opening up further to capitalist reforms.

Added Restrictions Adding to Volatility

Measures such as bans on short-selling and prohibition of certain language when it comes news media have largely been ineffective at quelling the volatility that has plagued the domestic Chinese equity markets for weeks now.  Arrests and probes of leading Chinese financial firms has led to renewed belief that trying to mix capitalism with a centrally planned economy might not be the best strategy for policymakers overseeing the development of capital markets.  In any event, frequent interventions are known to have explosive results.  Most of the time, short-selling bans are especially ineffective because it often results in increased volatility.  In the case of certain holders, such as pension funds and other longer-term holders, prohibitions on selling holdings also exacerbate swings.  These actions reduce overall liquidity, generating even more volatile swings in stock indices.