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China’s Market News: Chinese Authorities Address Stock, Commodities Plunge

China’s Market News: Chinese Authorities Address Stock, Commodities Plunge

Renee Mu, Currency Analyst

This daily digest focuses on market sentiment, new developments in China’s foreign exchange policy, changes in financial market regulations and Chinese-language economic coverage in order to keep DailyFX readers up-to-date on news typically covered only in Chinese-language sources.

- Chinese commodities plunged on Monday, with five major commodities hitting the daily limit-down levels.

- Shanghai Composite fell by -2.79% on Monday while the ChiNext Board dropped by -3.55%.

- Government policies are being aimed at normalizing financial markets rather than maintaining growth, according to an official newspaper.

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Sina News: China’s most important online media source, similar to CNN in the US. They also own a Chinese version of Twitter, called Weibo, with around 200 million active usersmonthly.

- Chinese commodities plunged on Monday, with a drop of over -6% in rebar (a steel product), a -5% drop in hot rolled steel and over a -4% drops in coking coal and iron ore. Speculative funds have rushed into commodity markets in April and drove prices to new highs. Chinese regulators warned that excessive speculation may result price bubbles, and in-turn and introduced tightened rules designed to cool down the rampant volatility.

- The Shanghai Composite Index fell by -2.79% on Monday and broke 2,900 level for the first time in 6 weeks. The ChiNext Board tumbled by -3.55% over the same session. Over 100 stocks in Shanghai and Shenzhen stock exchanges hit the daily limit-down levels.

The headline news on People’s Daily may help explain the drops seen in both markets.

People's Daily: the official paper of the Communist Party.

- The newspaper published a headline article on May 9th addressing China’s economy and financial markets. Within the article, they said “China’s Economic Trend in the Current and Following Periods is L-shaped, rather than U-shaped and is Definitely Not V-shaped,” due to weak demand and overcapacity. The paper went on to say that a temporary rebound will not lead to continued high growth like what the economy had seen in previous years.

The newspaper quoted an authoritative person’s comment that China “cannot and does not need to use persistent stimulus to promote the economy as it will cause price bubbles.” This “defines the target of government policies over the equity, foreign exchange and real estate markets, which is to help them return to normal, rather than maintaining growth”. Also the government should avoid injecting massive liquidity to stimulate the economy in the short-term as it will cause long-term issues.

This means additional drops in equities and commodities are likely to be seen over the following periods while the government withdraws funds and lets the markets come back to a more natural balance. The earning reports of listed companies show that the Chinese government has bought a significant amount of Chinese shares in the effort of supporting the market.

SAFE News: China’s foreign exchange regulator.

- In the first quarter of 2016, the net foreign investment in Chinese financial institutions increased to 3.50 billion Yuan from 1.08 billion Yuan in the previous quarter. The net Chinese investment in overseas financial institutions dropped to 11.61 billion yuan from 43.39 billion yuan in the previous quarter.

China Finance Information: a finance online media administrated by Xinhua Agency.

- The State Council released 14 measures in the effort to promote trade sectors. It includes using targeted reserve requirement ratios and targeted interest rates to support small enterprises and encouraging companies that conduct trade processing to move to the Midwest. The authority said the country is facing increasing downward pressure in trade. According to a report released by China’s Customs on May 7, China’s imports fell -5.7% in April from a -2% drop in March; exports fell -1.8% from a 11.5% increase in March.

Written by Renee Mu, DailyFX Research Team

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.