China’s ability to maintain the stability of its financial markets is being tested by the sudden hawkish turn of the Federal Reserve.

Beijing has repeatedly expressed concern that overseas liquidity-fueled bubbles will burst when monetary conditions finally begin to tighten. Bullish speculation at the domestic level has already provoked the intervention of the Chinese authorities, in particular on raw materials. As such, a move by the Fed that begins to avoid such a risk would be welcomed by the Communist Party, if its 100th anniversary was not in a few days.

The resulting volatility in global markets threatens to spill over into China and eclipse the Party’s pageantry on July 1. President Xi Jinping – who is expected to run for a third term in a leadership reshuffle next year – is due to deliver a speech and present medals on the day’s ceremony. Preparations included rehearsals of military planes for an air show in Beijing and buses packed with visitors dispatched to “red sites” to learn more about the history of the Party.

So far, Beijing’s ability to keep its markets stable appears to be working.

The CSI 300 stock index barely budged this week, even as the Fed’s pivot cheated benchmarks in Tokyo, London and New York. More broadly, volatility in the $ 12 trillion Chinese stock market remains low – with the gauge trading near its 200-day moving average – after authorities helped suppress frenzied trading earlier this year.

Chinese stock index returns to technical support level

“We don’t expect the Chinese markets to be particularly volatile before the CCP anniversary,” said Gary Dugan, managing director of asset manager Global CIO Office in Singapore.

As the yuan has gotten wilder – and weaker – Beijing had previously tried to curb appreciation after the currency hit a three-year high against the dollar. Over the past month, authorities forced lenders to hold more foreign currency in reserve and increased the quota of funds to be invested abroad to a record $ 147 billion. The Chinese currency has now depreciated by around 1.7% in June, but is anchored near its 100-day moving average.

Traders advanced their expectations for the cutbacks in spending in the United States after seven Fed officials forecast an interest rate hike as early as 2022 last week, down from four. On Tuesday, Fed Chairman Jerome Powell said the central bank would be patient while waiting to raise borrowing costs.

The second half of the year could see more risks to market stability, according to economists at Citigroup Inc. They predict that the economic impact of China’s credit crunch measures will become more visible, as a recovery of global production could put pressure on the country’s exports.

“The overall macroeconomic environment is likely to become less favorable for risky assets after the CCP’s centenary celebration in July,” Citi economists, including Xiangrong Yu, wrote in a note last week. “We think the policy tightening could become more pronounced.”


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Source: www.dailymaverick.co.za
This notice was published: 2021-06-23 03:29:24

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