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FX, markets strategists have mixed views on China stocks, yuan fix, PBOC

Saheli Roy Choudhury and Justin Chan | Special to CNBC
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Zhang Peng | LightRocket | Getty Images

With trading abruptly suspended twice in four days amid shock yuan fixes, even the pros can't agree on whether Chinese authorities have lost control of markets or are pursuing a cunning strategy.

Here's what they told CNBC about circuit breakers, market shutdowns and investor confidence in China.

China guides yuan sharply lower; jolts markets, offshore currency plunges

Jackson Wong, associate director at Huarong International Securities:

Wong said one of the main issues weighing on confidence was the depreciation of the . On Thursday, the People's Bank of China (PBOC) guided the yuan lower at the fastest pace since its shock devaluation in August. The reference rate was fixed at 6.5646 against the dollar, down 0.51 percent from Wednesday's fix.

"The yuan is already putting a lot of pressure to markets," Wong told CNBC.

"Last year, they first depreciated 2 percent and that sent the market [into a] huge turbulence. And then they had to do a lot of things to fix the confidence level. Now, three days into the new year, the renminbi has already depreciated 2.7 percent. That's a huge move. And a lot of investors, including funds managers, still couldn't figure out why China [did] this."

As far as circuit breakers go, he said the officials in China were "not very good" at implementing a tool that is designed to calm markets. Wong blames the 5 percent and 7 percent benchmarks that trigger a trading halt, and then a suspension, in Chinese trading for undermining the usefulness of the circuit breaker.

Seven percent was just too low a hurdle for a volatile market such as China's he said.

"They should just lift [the circuit breaker] or cancel it completely and have a 10 percent trade limit on individual stocks," Wong said.


Men look an electronic board showing stock information at a brokerage house in Beijing, China, January 5, 2016.
Chinese social media explodes on market shutdown

Daniel So, strategist at CMB International Securities:

So shared Wong's sentiment on apparent ineptitude among Chinese officials, suggesting that the PBoC's decision to fix the yuan lower against the dollar in recent days had given the impression the central would not defend the value of the currency for the time being.

"For now the [PBoC] will be comfortable to see the currency weaken further to help the economy," he said, adding that further depreciation, however, may eventually push the bank to intervene again.

So warned that another concern for market had been be the lifting of a ban on major shareholders from selling stakes in Chinese companies. The ban, implemented last July in an attempt to stem the rush of capital out of China's market, was due to lift tomorrow, and was expected to trigger a market exodus by big investors.

But after the market stopped trading today, the Chinese Securities Regulatory Commission (CSRC) pushed back the lock-up's end for a further three months.

"Investors may be rushing to sell," So said, of the anticipated end of the sales ban.

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Mitul Kotecha, head of Asia FX and rates strategy at Barclays:

Kotecha's view, however, is that the apparent market mayhem and mixed signals on the yuan is a "calculated" move by Chinese authorities to deter speculation.

"Everyone has been surprised by the pace of [yuan] weakness that we have seen in the year-to-date," he told CNBC. "We had the accelerated weakening towards the end of last year, we took that into account and suddenly we shot off again.

Kotecha did not agree with So's view that the PBoC had given up or lost control of the market.

"They still have a lot of control over the [renminbi] ... I think they want to keep the market guessing ... So this is not going to be a one-way bet. Yes, we are seeing weaker fixings now, but at the same time I wouldn't rule out intervention to come back in to reverse some of these moves in the offshore and onshore markets.

"So we are going to keep on guessing, and I think China's quite happy with that guessing game at this stage."

The IMF, the SDR and the yuan explained

Stephen Davies, CEO, Javelin Wealth Management:

Davies said markets had plenty of reason to be cautious and factor in relatively low returns on investment for year as a whole, following a turbulent ride in 2015.

"It's very easy to get side-swiped by the big headline numbers in Shanghai and obviously they are very large," he said. "But in reality, do they have real impact elsewhere? Only insofar as genuine reflection of the strength, or otherwise, of the underlying Chinese economy."

The impact outside China was, in truth, not large because moves in A-shares were driven by local policy action, momentum, and liquidity, said Davies.

Domestic punters, he added, were confounded by the PBOC's "extremely confusing" policy actions and, as a result, were pulling their money out of Chinese markets.

"The implication at the end of last year, when the renminbi were injected into the SDR system of the IMF, was that we would be looking at a greater degree of stability and narrowing, perhaps, of that discount between offshore and onshore renminbi."

Instead, the gap between offshore and onshore exchange rates for the yuan has widened. The yuan plunged to a five-year low in offshore trading on Wednesday.

This, Davies concluded, had led to further confusion because various Chinese policymakers, at various stages, have said they did not want to see the gap widen.

"And yet during the course of this week, we've had other policy makers who have been implying something [in the] reverse. So I think to some extent, from a policy perspective, the message needs to be firmed up and made a little more unified."

Richard Yetsenga, head of global markets research at ANZ:

Yetsenga reckoned, though, that central bank's message to markets had been clear.

Much like last August's devaluation of the currency, Yetsenga said, "we seemed to have had another very clear policy shift from China just in recent days."

"And even before recent days, we had a two percent depreciation of the renminbi in a bit more than a month before that," he added.

"So the moves already were quite substantial. We have had just another escalation. My gut feel is this little episode of depreciation is close to finishing but the fix this morning did surprise me. No question, it was quite a bit weaker than we thought."

Yetsenga said that a one-off, large devaluation, which some commentators were forecasting, would not be an effective strategy.

"China can't keep running down reserves in the way they've been doing in the last year or so," he said, "Because when you have accumulated reserves through sterilized intervention, running down reserves means you're also contracting domestic liquidity ... Why would you do that?"

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