China's major stock indexes regained some ground on Friday after Beijing ditched a circuit breaker mechanism that halted trading twice this week and had been blamed for exacerbating the market sell-offs it was designed to limit.
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The People's Bank of China also raised its guidance rate for the yuan for the first time in nine trading days, having allowed the currency's biggest fall in five months on Thursday, sending shivers through regional currencies and global stock markets as investors feared it would trigger competitive devaluations.
Chinese markets have had a turbulent start to 2016, buffeted by the PBOC's lower yuan fixings against the dollar, two days of stock exchange suspensions, weak factory and service sector surveys, and worries about looming share sales by major stakeholders once a ban on such sales expires.
With the stocks circuit breaker deactivated late on Thursday, the CSI300 index closed up 2 percent at 3,361.56 points on Friday, while the Shanghai Composite Index also closed up 2 percent at 3,186.41 points.
The CSI300 had lost around 12 percent in the first four trading days of 2016, giving up all the gains made in 2015.
The circuit breaker, which only came into effect on Jan. 4, came under fire for kicking in too soon with its initial pause in trading, and then encouraging a rush to sell before a second trigger halted the day's trade permanently.
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"The market is back to normal," said Tian Weidong, analyst at Kaiyuan Securities. "Investors can buy and sell as they wish. Under the circuit breaker mechanism, the market was suffocated."
John Woods, Chief Investment Officer, Asia-Pacific, at Credit Suisse's private bank said the turmoil seen this week was likely to be a "short, sharp shock" similar to last summer's China stocks crash, which ironically first convinced the stocks regulator of the need for a circuit breaker.
To calm currency markets, the PBOC set its daily midpoint rate for the yuan at 6.5636 per dollar prior to market open, firmer than Thursday's fix at 6.5646 and closing quote of 6.5929. Under China's currency regime the yuan is allowed to deviate 2 percent either side of the midpoint.
The yuan firmed during the day, with dealers suspecting that the central bank intervened through state-run banks to support its currency, which could help allay fears that any depreciation would be allowed to continue.
The onshore yuan was at 6.5894 at around 0730 GMT, while the offshore yuan was about 1.4 percent weaker at 6.6860, narrowing a spread that reached around 2 percent a day earlier.
CALL FOR CLARITY
Since the PBOC devalued the yuan by about 2 percent last August, the onshore-offshore spread had been growing, encouraging an outflow of capital that Beijing has been struggling to stem through measures including halting some forex business by a number of foreign banks, and ordering banks in some trading hubs to limit clients' dollar purchases, sources have told Reuters.
"While the market was left with uncertainty on how far the yuan will fall, the Chinese central bank's action (the stronger fix on Friday) was taken as a signal that it does not intend to keep allowing the yuan to fall," said Yoshinori Shigemi, a market strategist at JPMorgan Asset Management.
After its sharply lower fix on Thursday, the PBOC had later sown confusion by reportedly intervening heavily to defend the yuan in offshore trade, reversing a decline of more than 1 percent that took it to a record low of 6.7600 per dollar.
That left dealers at a loss to know what the central bank's aims were. "Market volatility this week suggests that nobody really knows what the policy is right now. Or if the government itself knows or is capable of implementing the policy even if there is one," said DBS bank.
"The market's message was loud and clear, that more clarity and less flip-flopping is needed going forward."
Markets will remain wary of China's currency goals, as mixed messages come from the central bank, which has repeatedly said it sees no basis for the currency to depreciate, while steering it gradually lower.
Sources told Reuters on Thursday that the PBOC is under increasing pressure from policy advisers to let the currency fall quickly and sharply, by as much as 10-15 percent, as its recent gradual softening is thought to be doing more harm than good.
Oversea-Chinese Banking Corporation said Friday's fix, however, gave a better insight into PBOC policy, as it calculated that it returned the yuan to around the 100 level on the RMB index, a basket of currencies, against which the central bank has said it prefers to benchmark the currency, rather than a direct dollar rate.
A flurry of Chinese economic data in the coming weeks is likely to show economic activity continued to slow in December, adding to concerns about the outlook for 2016.
(Reporting by Pete Sweeney and Lu Jianxin; Additional reporting by Kevin Yao, Lisa Jucca, Kim Coghill and Samuel Shen; Writing by Will Waterman; Editing by Simon Cameron-Moore, Eric Meijer and Jacqueline Wong)