Why It Matters

China's game of chicken

China's respected central bank chief had been largely missing from public view the past eight months as investors pummelled its stocks and currency amid startling levels of money exiting the mainland. In the past month, though, he has shown up no less than four times, the last of which was on Saturday.

Along with his top three deputies, and Mr Liu Shiyu, the stocks regulator, Mr Zhou Xiaochuan addressed the media just as the annual party congress wound down. His message was simple: Massive monetary policy stimulus was not being contemplated (because it is not needed), China will ride out its current crisis, and those betting on sharp falls in the yuan are fantasising ("no need at all to rush to buy US dollars").

Mr Liu signalled he'll maintain a floor under the stock market. Both officials affected a cheerful insouciance, even as industrial production and retail data released that day were below expectations.

 

So, here's the message: First, things are under control. Second, whatever the costs, Beijing isn't going to allow speculators to party.

Mr Zhou has put his credibility on the line. It may be the correct thing to do under the circumstances; Hong Kong famously intervened to prop up its stock market during the Asian financial crisis, smashing hedge funds betting the other way. In China's case, though, it is uncertain whether the fundamentals are as sound as Hong Kong's were then.

Moody's, the ratings company, does not think so. The same day it lowered its outlook on Hong Kong from stable to negative because of the territory's exposure to the mainland. While the rating stays at Aa1, the implication is to relay the risk of a downgrade for China.

This makes it a game of chicken between regulators holding the dykes even as they eye the dipping funds in their massive tanks and speculators trying to keep their nerve as big bets risk going sour if the stocks and currency cannot be dislodged. The next 10 weeks will reveal who is the poultry.

A version of this article appeared in the print edition of The Straits Times on March 15, 2016, with the headline 'China's game of chicken'. Print Edition | Subscribe