Beijing's micromanagement of the turmoil in equity markets is only worsening confidence in the world's second largest economy as a series of contradictory policy measures creates further confusion.
A surprise decision on August 11 to make the yuan more "market oriented" was followed by a press conference two days later where People's Bank of China (PBoC) vice governor Yi Gang said the central bank would "effectively manage" the exchange rate when volatility arises.
Fresh developments this week also appeared to further reverse the PBoC's decision for a market-oriented currency. The PBoC will tighten rules on currency forwards starting from October in an attempt to limit further depreciation, sources told Reuters on Wednesday.
"It seems pretty clear that there are deep disagreements at the highest levels of the Chinese government over what to do with the equity markets," remarked Angus Nicholson, market analyst at IG.
The policy flip-flops come at a delicate time for the Chinese economy, whose once buoyant growth is now sputtering. Signs of a slowdown have exacerbated a selloff in everything from the Australian dollar to crude oil in recent days.
Beijing's divergent actions are perhaps best reflected in its handling of the stock market crash that's erased 30 percent off Shanghai and Shenzhen shares in the past three months.
On August 14, news emerged that China Securities Finance Corp, the state agency responsible for supporting share prices, would refrain from increasing equity holdings barring unusual volatility and systemic risk. But last week, a group of state financial institutions tasked with purchasing blue-chip stocks—known as the "national team"—reportedly ramped up its efforts, triggering combined gains of 10 percent on the Shanghai Composite Thursday and Friday
Moreover, Monday saw the China Securities Regulatory Commission (CSRC) announce a push for further mergers and acquisitions, dividends and buybacks in another attempt to boost stocks.
To be sure, this marks a slight improvement, noted Danyi Yang, senior analyst at Frontier Strategy Group. "It seems like they're turning to more sustainable intervention, compared to their earlier intervention methods of direct share purchases."
Still, all this has only exacerbated volatility, drawn international criticism and scared investors away from a stock market hoping to gain entry into the MSCI Emerging Markets Index.
"Some have even begun to question whether the Chinese government has lost control," Standard Life Investments said in a report on Wednesday.