The People's Bank of China, the central bank, said last week that it is capable of keeping the yuan "basically stable at a reasonable equilibrium level" despite the emergence of speculative trading in the currency.
Experts tell investors overseas, 'Worry, but don't panic'
There's no reason for panic. Worry, yes, but not panic.
That was the opinion of some US investment strategists after China's main stock market went into another free fall last week and roiled other markets across the world.
Stock prices in China fell so fast that for the second time in four days last week, the new circuit-breaker mechanism kicked in and halted trading in less than an hour after it began. After the market closed Thursday, however, Chinese regulators suspended the circuit-breaker mechanism, hoping that will allow markets to find their level.
China's tumbling stock prices are, in themselves, nothing for investors outside the country to panic over. Because of government regulations, very few foreigners even own stocks on the Chinese markets that seized up.
"This is not a situation that should result in panic; it should result in caution," said Kristina Hooper, head of investment strategies for the United States at Allianz Global Investors.
"Chinese growth is clearly slowing, but it is not plummeting," said Ben Mandel, a strategist with JPMorgan Funds.
The market selloff that began early last week, had its roots in the expectation that large shareholders in index-linked companies will likely resume selling as soon as the six-month ban on such sales ended on Friday.
Ironically, the new circuit breakers, which limited the extent of market movement to 7 percent in the hope of tackling volatility, not only exacerbated the selloff but aggravated the liquidity crunch, analysts said. They underscored criticism in media that circuit breakers in advanced markets get triggered only if the movement is steep to the extent of 15 to 20 percent.
They further said that investors in the A-share market, in the hope of finding consolation, could consider taking a step back over the weekend to focus on this year's possible broader trend.
Wendy Liu, chief China strategist at Nomura Securities, said that the pace of US Federal Reserve's rate hikes and China's credit cycle would be two major drivers of the market this year.
Relief might come, but not until around March, if signs brighten by then that Nomura's forecast of two Fed rate hikes in June and December will likely come to pass, Liu said in a research note. The consensus forecast is for four Fed rate hikes this year.
"In China, its credit cycle will further unfold, as a key part of the supply-side reforms, which will likely lead to rising bank non-performing loans, various credit defaults and closure of 'zombie' companies, including some State-owned enterprises," Liu said. "While this may raise risk aversion, it is the very reform that the market has been waiting for."
Several analysts feel prompt government action on the foreign exchange front could help anchor investor anticipation for the value of the renminbi.
Last week, the Chinese currency weakened substantially to reach the lowest level since 2011, intensifying fears of capital flight from China. It is feared any such outflows would further destabilize the fragile stock market.
