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China's economy 'stable' experts claim

China's economy

​China's foreign exchange regulator has moved to reassure global markets that the economy is “largely stable and healthy,” as investors prepare themselves for a potential return of conditions that 'shook the world' earlier this month.

On January 7th, there was a sharp fall in the first hour of trading on the Shanghai and Shenzhen stock exchanges, which triggered a so-called circuit breaker, which halted trading after a five per cent fall. When it returned, investors panicked in a way which meant the circuit breaker was triggered for a second time, closing the markets for the day.

In the aftermath of this disastrous day, attention throughout the past week and a half has been focused on the central bank in China and its management of the renminbi. So far, the bank has moved to get rid of the circuit breaker that caused the disaster, as well as extending the ban on sales of shares by large shareholders, in a bid to stabilise the markets.

And it claims that many investors are now ignoring its advice, which stated that traders should be looking to stabilise the renminbi against the basket of the 13 currencies it specified, rather than simply putting their focus on the renminbi's volatility against the dollar.

This comes after a fall in the last week, which saw the renminbi drop 1.5 per cent against the greenback, a very steep fall for what is normally a very heavily controlled currency.

The State Administration of Foreign Exchange (SAFE) has moved, however, to reassure investors that the Chinese economy is not in a state of crisis.

“China’s economic fundamentals are strong,” the regulator said in a statement. “Foreign exchange reserves are relatively abundant and the financial system is largely stable and healthy.”

However, there are still fears that the economy may not be as strong as the regulator wants to believe.

SAFE continues to scrutinise banks which help clients arbitrage between the onshore and offshore renminbi markets, which many have said goes against the advice of the International Monetary Fund (IMF) and its designation of the renminbi as an official reserve currency, according to the Financial Times.

“We seem to be drifting back into a two-tiered [renminbi] system and that is worrying,” one investment trader told the newspaper.

As China looks to stabilise the currency amid ongoing fears, the People's Bank of China has also announced that it is looking to target offshore short selling with new regulations which would force banks to set aside some of their offshore renminbi deposits as reserves.

It's hoped that this move will help to cool fears over the long-term depreciation of the currency, easing worries that traders have had ever since the sharp fall hit the markets on January 7th.