China Turns from Stick to Carrot

Last Friday was marked by strong pressure on Chinese shares, which lost 10-20% each in New York trading due to the announcement that DiDi, the Chinese counterpart to Uber, will delist in the US and float in China by the middle of next year.

This is a significant concession to the Chinese authorities, and investors took it as a signal that we will be hearing more announcements like this soon. This is probably Politburo’s policy turn from a stick to a carrot.

Chinese equity indices have been falling since February due to three negative factors: regulatory restrictions on the technology sector, tight monetary policy and waning economic growth.

However, the risks of an economic slowdown seem to have come to the forefront, pushing back fears of inflation Inflation Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is m Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is m Read this Term and turning to monetary stimulus to stabilise financial markets. On Monday, the People’s Bank of China lowered the reserve requirement for banks, freeing up about $188bn of liquidity Liquidity Liquidity refers to the extent of a financial instrument’s ability to be bought or sold without causing price fluctuations. Thus, if an asset is extremely liquid, it means one can trade that asset in the knowledge that one’s specific dealing won’t create significant movements in the market.This is because there exists such a large number of traders going both long and short, generating huge volume for that particular asset. Liquidity in the FX MarketTake the example of the foreign exchange marke Liquidity refers to the extent of a financial instrument’s ability to be bought or sold without causing price fluctuations. Thus, if an asset is extremely liquid, it means one can trade that asset in the knowledge that one’s specific dealing won’t create significant movements in the market.This is because there exists such a large number of traders going both long and short, generating huge volume for that particular asset. Liquidity in the FX MarketTake the example of the foreign exchange marke Read this Term.

The measures are designed to support small businesses by easing access to finance. The bank took the step because of early signs that inflationary pressures are stabilising and the need to get the economy back on growth. The policy easing is moderately negative for the renminbi and should weaken the yuan, taking it away from the 2.5-year highs against the dollar.

Furthermore, the Chinese Politburo promises “healthy development” for the real estate sector. It is unlikely that this wording will allow the asset holders of distressed property developers Evergrande or Kaisa to breathe a sigh of relief. But for the market, such top-level attention raises hopes that the peak of pressure is over.

Since the global financial crisis, China has largely ensured a growth recovery thanks to the massive stimulus to the economy. This year, the Politburo avoided such sweeping actions for fear of adding fuel to the inflation fire. However, it seems that they are not prepared to stay on the sidelines any further.

Friday’s sell-off in the Chinese giants is reminiscent of a final blow to a trend, which is often followed by a reversal. We saw a similar thing with oil in April 2020.

Today the H-Shares Index is taking out Friday’s momentum on the US markets, losing 2% and trading at 5.5-year lows, near the bottom of the long-term trading range, down more than 30% from the peaks.

Reaching these levels has caused the authorities to move to support the economy and the financial system. We could then see increased buying on the realisation that the sell-off in Chinese companies has gone too far, pushing them back to multi-year lows.

This article was written by FxPro’s Senior Market Analyst Alex Kuptsikevich.