Chinese shares had a wild Wednesday, dropping 5 percent before making steady gains in the afternoon and finishing up positive, with the Shanghai Composite closing up 1.2 percent. The sudden reversal prompted speculation that further easing was introduced to prop up the market.
The Shanghai Composite’s quick turnaround suggests optimism surrounding market intervention in general – but will the Chinese be able to effectively prop up the volatile market? Authorities have tried cutting interest rates and reducing Reserve Ratio Requirements, but there still seems to be a long way to go before we see significant stabilisation.
Analysts suggest that the markets could be panicking because of the recent surprise valuation of the yuan, which suggests that the Chinese are worried about losing control. On the other hand there is also the argument that the devaluation of the Yuan is just another step in Beijing’s plans to revive the economy.
Following the Chinese devaluation, Vietnam also devalued their currency by 1 percent last week. This could be a first sign of a currency war that will further unhinge China’s economy.
The Chinese are likely to have more up their sleeve, but for now one may be wise to treat the Chinese stock market as a spectator sport rather than a buying opportunity.