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People’s Bank of China Intervention in Stock Market Debacle Lacks Transparency

Jp Buntinx · @http://twitter.com/jdebunt | Jan 05, 2016 | 03:44

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Yesterday’s news regarding the Chinese stock market once again showed how brittle the global economy is at this point. With stocks tumbling slightly over 7 percent, trading was suspended a few hours before the markets closed. Things did not get off to a good start earlier today, as an early 2% loss was worrying a fair few investors. But things calmed down once the People’s Bank of China intervened and poured money into money markets.

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People’s Bank of China Intervenes in Trading

Based on the information provided by Reuters, it looks like the People’s Bank of China prevented another major loss for the CSI300 earlier today. Early traded prompted another 2% stock decline, which indicated another 7% less for the day was within the realm of possibilities. If this event had transpired, nation=wide trading in China would be suspended for the second day in a row.

Thanks to an intervention by the Chinese central bank, as well as the stock regulator, the earlier losses were somewhat stemmed at the right time. However, it took close to US$20bn poured into money markets by the People’s Bank of China to reduce the losses to just 1%.

At the same time, further restrictions on selling shares by major stockholders in listed companies were announced by the China Securities Regulatory Commission. Whether or not this announcement will set off further panic selling over the next few days, remains to be seen, as the Chinese stock market seems to have calmed down for the time being

It will prove to be quite a challenge to keep the volatile stock market in China somewhat stable over the next few months. Government intervention may have saved the day for the time being, but moves like these could have an adverse effect as well. Suppressing trading volume is not a smart decision, as it could lead to even wider price swings throughout the rest of the year.

Furthermore, there are rumours circulating regarding the further depreciation of the Chinese Yuan, although there has been no official indicators whether or not this will be the case. At the same time, the government and People’s Bank of China can only keep things artificially afloat for so long, despite their best efforts.

Lack Of Transparency Could Hurt Chinese Economy

The uncertainty regarding the current economic state of China will not do any good for the country’s economy. Government interventions are announced, but very few details are made public. For example, no one knows for sure where the US$20bn came from that was pumped into money markets by the People’s Bank of China.

By embracing blockchain technology, more transparency could be created for the central bank, government officials, and investors alike. Movements of funds between sources could be traced publicly, giving investors an indication as to what is going on. Keeping this shrouded in mystery is the last thing the Chinese economy needs right now.

What are your thoughts on the action by the People’s Bank of China to keep the stock market afloat? Let us know in the comments below!

Source: Reuters

Images courtesy of PBOC, Shutterstock