China’s Latest Stock Market Crash

choi

(1) Lingling Wei and Anjani Trivedi, 人民币缘何惨遭 '空' 袭？ 华尔街日报中文版, Jan 8, 2016
cn.wsj.com/gb/20160108/fin111210.asp

, which is translated from

Lingling Wei and Anjani Trivedi, China's Shift on Yuan Strategy Backfires; Efforts to guide yuan down to spur exports send investors to the exits. Wall Street Journal, Jan 8, 2016.
http://www.wsj.com/articles/cont ... -beijing-1452178733

Quote:

"the International Monetary Fund added the Chinese yuan to its elite basket of global reserve currencies in late November [Nov 30]* * * The IMF stamp of approval * * * also, Chinese officials believed, gave them the ability to shift priorities from bolstering the yuan in the eyes of the world to enlisting the yuan in the national effort to stimulate the slowing economy, according to interviews with more than a dozen Chinese officials and advisers to the central bank. * * * [Ever since] the [Beijing] authorities have embarked on a perilous path of trying to gradually weaken the currency to help make China’s exports relatively cheaper in foreign markets, these people say.

"Even after guiding the yuan to its lowest level against the dollar in five years on Thursday, the central bank was forced ['by intervening in the Hong Kong market Thursday'] to start buying [yuan to increase its value] again to stop the decline turning into a rout at the hands of global traders, many of whom sit just off China’s mainland coast in the skyscrapers of Hong Kong.  For the traders, the PBOC’s convulsions left them shellshocked as bets as big as $50 million placed by hedge funds that trade the yuan outside of China were put in jeopardy, traders said.

"The fallout in other markets [those outside China] was severe as other investors interpreted the central bank’s moves in two ways—as a sign that China’s economy is slowing more precipitously than many expected, and as an indication that the Chinese leadership isn’t on top of how to deal with it, a recurring worry since the government bungled a stock-market rescue in the summer.

"Since mid-August, when the central bank delivered a surprise devaluation, it has been blowing through the country’s foreign-exchange reserves to fend off those betting against the yuan.  China’s reserves slumped a record $108 billion to $3.33 trillion as of the end of December from the previous month, data showed Thursday. The drop is nearly five times what analysts estimated.

There are prevailing "market expectations for a still-weaker yuan. In Hong Kong, where the yuan can be bought and sold freely, the Chinese currency now trades at a steep discount to its mainland cousin, whose trading is limited within a government-dictated band. The gap has led some investors to try to profit from the different exchange rates, causing irregular flow of funds across China’s borders. * * * Wary of continued weakening of the yuan, some Chinese companies are moving to pay off their [dollar-denominated] debt early.

My comment: Quotation 4 comes with a graphic. However, many reports have attributed lower foreign exchange reserve to capital flight.  Likely only China's PBOC knows how much it has spent (dollars in buying yuan so as to defend yuan from too much depreciation).

choi

(2) Mark Magnier, 市场动荡之际中国经济阴云密布. 华尔街日报中文版, Jan 8, 2016
http://cn.wsj.com/gb/20160108/cec131512.asp

, which is translated from

Mark Magnier, Gloom Hangs Over China's Economy Amid Market Turmoil. Wall Street Journal, Jan 8, 2016 (one of front-page top reports).
http://www.wsj.com/articles/gloo ... -turmoil-1452182117

Quote:

(a) Compared with its stock exchanges, "China’s wider economy is even more troubled than the official data show, many analysts believe.

" 'People doing business here long-term have known for a couple of years that growth is much less than the government says it is,' said Conference Board economist Andrew Polk. He thinks actual growth is closer to 4%.

(b) "Economists cautioned that momentum could slip further in the first quarter as factories close for the Lunar New Year holiday celebration in February and local governments wait for economic targets traditionally released at the annual parliament meeting in March. Retail spending could slow this year if unemployment increases.

My comment: There is no need to read the rest of this report.

choi

(3) Bradley Hope and Dan Strumpf, Circuit Breakers Show Their Limits. Wall Street Journal, Jan 8, 2016.
http://www.wsj.com/articles/the- ... breakers-1452205576

Quote:

"The US had its own run-in with unintended consequences from such rules [circuit breaker] last year. On the morning of Aug 24, volatile trading triggered single-stock circuit breakers designed to prevent a repeat of the 2010 flash crash, when markets swung down by more than 1,000 points before sharply recovering. The mayhem on Aug 24 was in large part exacerbated by rules put in place to damp volatility.  In the US, trading was restored because the marketwide circuit breaker for halting trading for the day is much higher than China’s—20%.

"James Angel, a finance professor at Georgetown University who recently completed a 56-page analysis of the circuit-breaker system on behalf of US exchanges. * * * [He] said there is no convincing evidence that halting the stock market for any reason other than a disaster or an information event – if the President was endangered, for instance – helps reduce volatility.

"The US marketwide circuit breaker was first introduced in response to the 1987 Black Monday stock-market crash, which investigators later concluded was made worse by a deluge of buy and sell orders that got clogged in the exchange infrastructure. Instituting a trading pause, they said, would give breathing room and allow traders to restore order. * * * Under the current rules, a 15-minute pause kicks in when the price of the S&P 500 index declines by 7% or more before 3:25 p.m. Another is triggered if it declines by 13% or more. If it crosses 20%, all trading is halted.