Shanghai shares rise after official U-turn


Shanghai shares rise. Photo: Wenhao Yu/EPA

Shanghai shares rise. Photo: Wenhao Yu/EPA

Shanghai shares closed higher Friday after authorities reversed course and suspended a new "circuit breaker" mechanism that had fuelled a global rout by twice automatically closing Chinese markets early.

After a volatile morning the benchmark Shanghai Composite Index closed up 1.97 percent at 3,186.41, while the Shenzhen Composite Index, which tracks stocks on China's second exchange, added 1.05 percent to 1,978.72.

However, Shanghai still ended the week almost 10 percent lower and Shenzhen lost more than 14 percent.

"The scrapping of the circuit breaker system will help to stabilise the market, but a sense of panic will remain, particularly among retail investors," Li Jingyuan, general manager at Shanghai Bingsheng Asset Management, told Bloomberg News.

Government-linked entities stepped in to buy stocks for at least the second time this week to shore up the market, Bloomberg reported, quoting people familiar with the matter.

Global investors have been alarmed by slowing growth in the world's second-largest economy, which is expected to have expanded last year at its slowest pace in a quarter of a century. Official data on fourth-quarter and annual growth is due to be released later in January.

Friday's rise came after the China Securities Regulatory Commission (CSRC) late Thursday said it was shelving the "circuit breaker", which it had introduced at the beginning of the year.

The mechanism was meant to calm China's notoriously volatile markets -- which went into a tailspin in mid-2015 -- by automatically suspending trading for 15 minutes if they fell by five percent in one day, and closing them early if they dropped seven percent.

- Yuan rate up –

But dealers said the system instead heightened selling pressure from traders who wanted to avoid being stuck with shares they did not want to hold.

"After weighing advantages and disadvantages, currently the negative effect is bigger than the positive one," the CSRC said in a statement. 

"Therefore, in order to maintain market stability, CSRC has decided to suspend the circuit breaker mechanism."

Rumours circulated on China's Twitter-like Weibo that CSRC chief Xiao Gang had submitted his resignation over the debacle, which would be announced at the weekend.

Similar speculation has been heard before, and investors have repeatedly called for Xiao's head in recent months over the government's interventions following the market falls.

Authorities also set the central rate for the yuan currency marginally higher against the US dollar on Friday, ending eight days of falls.

The People's Bank of China (PBoC) set the daily reference rate at 6.5636 to the greenback, according to the China Foreign Exchange Trade System.

It was up 0.02 percent from Thursday, when it was set at its lowest level in nearly five years.

China limits the yuan to rising or falling two percent on either side of the reference rate.

The eight days of falls revived concerns over the currency of the world's biggest trader in goods.

A lower unit should make Chinese exports more competitive on world markets, but at the cost of its imports becoming more expensive in yuan terms. The country will announce inflation statistics for December at the weekend.

China has pledged to make the value of the yuan more flexible and market-oriented, and the International Monetary Fund has announced the unit will join its elite reserve currency basket.

© AFP

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