The Economist
ONE of the many oddities of the topsy-turvy world of Chinese finance is that red is green and green is red. In most countries “going into the red” means losing money; stocks that are falling are often depicted in red on ticker boards. In China, however, red is auspicious and so is the colour for stocks that make gains; green is for the losers. Before trading started on January 4th, the first trading day of 2016, Chinese financial media were full of cheery predictions that the nation’s markets would “open the door to red”—that is, get off to a flying start. But when the door opened, it was a flood of green.
The CSI 300, an index of the country’s biggest stocks, fell by 7%, the worst-ever start to a year for Chinese markets. Small-cap stocks fared even worse, many falling by the daily maximum of 10%. Monday was the first day of operation for new “circuit breakers”—automatic 15-minute pauses in trading whenever the CSI 300 swings up or down by 5%. These are intended to restore calm when the markets are in a frenzy. No such luck: less than ten minutes after trading resumed following the first such pause, the index fell by another two percentage points. That triggered another circuit breaker, prompting a suspension in trading for the remainder of the day.
China’s currency also glowed green on Monday. It started the year with a 0.6% fall against the dollar, a large move given the many restrictions on trading. The central bank set its daily reference rate below 6.5 yuan to the dollar for the first time since 2011, suggesting that it will tolerate more depreciation in the coming months. It is certainly under pressure to do so. Local companies are positioning themselves for a weaker yuan, driving the hefty capital outflows of recent months. And the offshore trading rate for the yuan is nearly 2% lower than the onshore rate, implying that investors expect it to keep falling. It is of course dangerous to read too much into one green-tinted day, especially for a stockmarket as volatile as China’s. Share prices had rebounded after crashing this summer (when trading opened, the CSI 300 was up by more than 20% since August’s nadir) and a fresh correction had seemed inevitable. Regulators have started to relax the many extraordinary measures they had taken in recent months to prop up the market. Come Friday, the temporary ban on selling for those who own stakes of 5% or more in any company will be lifted. Some of the selling was in anticipation of that. The new circuit breakers, far from calming investors, may have exacerbated the sense of panic. The economy also appears to be on much the same path as last year: surveys published so far in January have shown weakness in manufacturing but strong growth in the services sector. Nevertheless, it is surely not the kind of start to 2016 that Chinese authorities were hoping to see from their financial markets. They have consistently claimed that their stockmarket rescue was only meant to be temporary. Yet if the sell-off continues, it would not be surprising to see them wade in once again. As for the yuan, the central bank has signalled that it is willing to see depreciation, at least against the dollar. Its resolve may now be tested: sustained depreciation against the greenback is likely to fuel yet more capital outflows and deal another blow to economic confidence, which is already fragile. There is at least one English metaphor that suits the colour-coding of China’s markets: they are looking a little green around the gills.
