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Categorized | Currencies

China stock market unfazed by falling renminbi

Posted on November 30, 2016

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors.

The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi devaluation caused an already falling market to drop further.

That episode seems to be a distant memory for investors, who say the central bank is getting better at communicating policy moves. Now the renminbi’s reference rate is determined by the previous day’s currency market movements.

“The domestic stock market rises when the renminbi goes down, which means equity investors don’t think lower renminbi is bad,” said Chen Long of Gavekal Dragonomics, a Beijing-based consultancy.

The positive half-year for the stock market is mainly fuelled by a lack of alternative investment options as domestic real estate has cooled, according to Chen Xingdong, chief China economist at BNP Paribas in Beijing.

“Last year stock investors moved their money into property. But that market’s tightly regulated now, and so money has flooded back into the stock market,” he said.

The current appetite of investors for stocks is a “classic short-term versus long-term response”, according to Chris Powers of Z-Ben Advisors, a Shanghai-based consultancy. “People can see in the short term that a falling renminbi may benefit exporters and aid monetary easing efforts.”

The enthusiasm comes despite a weaker renminbi hindering the Chinese government’s goals of internationalising its currency and rebalancing the economy towards consumption, he suggested.

Meanwhile China’s chances of being included in the highly desirable MSCI index are even lower now that Beijing plans stricter capital controls to stem the renminbi’s further decline.

China’s leadership has been pushing to get Chinese stocks into the index, which would mean funds would automatically send a wave of capital in Shanghai’s direction.