China stocks rise after selling ban extended but offshore yuan fall accelerates

An investor at a brokerage house in Fuyang, Anhui province on Nov 18, 2015.
An investor at a brokerage house in Fuyang, Anhui province on Nov 18, 2015. PHOTO: REUTERS

SHANGHAI (REUTERS) - China's blue chip shares rose on Wednesday (Jan 6) after state media said a selling ban on major shareholders brought in to help arrest a market crash last summer would remain in place until the government publishes new rules on such disposals.

The ban was set to expire at the beginning of next week, but after markets crashed 7 per cent on Monday morning, the China Securities Regulatory Commission (CSRC) said it would implement a new policy to manage the pace of stakeholder sell-off, without specifying when the new policy would be ready.

The CSI300 index was up 0.4 per cent at 3,490.95 points at the end of the morning session, while the Shanghai Composite Index had gained 0.7 per cent to 3,310.24 points.

China CSI300 stock index futures for January were up 1.4 per cent at 3,443.8, but are still 47.15 points below the current value of the underlying index, indicating expectations of a fall.

Shen Weizheng, fund manager at Shanghai-based Ivy Capital, said extending share sale restrictions would prolong market bearishness.

"It's like the sword of the Damocles, always hanging over your head. The best way is to remove restrictions altogether."

The indexes were up despite data released after the market opened showing that growth in China's services sector slowed to its weakest in 17 months in December, which came two days after figures showing factory activity shrank for a 10th straight month.

The slowing economy contributed to weakness throughout 2015 in China's currency, which was weaker again on Wednesday after the People's Bank of China unexpectedly fixed the midpoint rate at 6.5314 per US dollar prior to the market open, even weaker than the previous day's closing quote 6.5157.

"The midpoint was a surprise. Still, it stayed in line with the PBOC's tone of late to lead the yuan to edge down," said a dealer at an Asian bank in Shanghai.

That triggered further selling in the offshore yuan , which was trading at 6.6770 per dollar, a hefty discount of nearly 2 per cent against the onshore rate of 6.5465 and closing in on its record low, adding to a spread that is encouraging capital to flow out of the country.

Zhou Hao, Commerzbank's senior Emerging Markets Economist for Asia, said the sudden movement in the fixing rate would create more market volatility and suggested Chinese authorities were willing to tolerate more weakness in the currency for the time being.

China's trade partners - and regional competitors for offshore export markets - will be wary of the economic impact of a sliding yuan.

China's struggling exporters might benefit from a softer currency, but it would also increase the cost of servicing offshore debt incurred by Chinese companies and make overseas investments more expensive for domestic firms. It would also further damage corporate interest in using the yuan for trade and investment - another policy goal.

As the US dollar has rallied against other currencies as the US has lifted its interest rates and increased the relative attractiveness of dollar assets, Beijing has argued it has room to let the yuan readjust, but it has also consistently said there is no market case for significant devaluation.

However, almost immediately after the yuan was admitted into the International Monetary Fund's currency reserve basket in November, the rate of devaluation has been allowed to accelerate, losing around 2.5 per cent since.