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Only way for China markets is up as Xi prepares for WWII parade

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Chinese stocks rallied for a second day and the yuan gained the most since April on speculation authorities are propping up markets before President Xi Jinping takes the stage at a World War II victory parade next week.

[BEIJING] Chinese stocks rallied for a second day and the yuan gained the most since April on speculation authorities are propping up markets before President Xi Jinping takes the stage at a World War II victory parade next week.

The government resumed intervention in equities on Thursday to halt the biggest selloff since 1996, according to people familiar with the matter. China's central bank strengthened the yuan's reference rate by the most in five months Friday, a move that suggests policy makers are trying to "save face" before the Sept 3 parade, according to Brilliant and Bright Investment Consultancy Ltd.

Swings in Chinese markets this month have rattled investors worldwide as they struggle to anticipate policy actions in the world's second-largest economy. China's 2013 pledge to let markets play a decisive role is being put to the test after a US$5 trillion tumble in shares since mid-June and a yuan devaluation on Aug 11 that heightened concerns over capital outflows.

"China wants to save face as the parade approaches," said Daniel Chan, a Hong Kong-based analyst at Brilliant and Bright Investment. "The fixing shows the desire to calm the market and limit yuan devaluation expectations." The Shanghai Composite Index climbed 1.9 per cent to 3,143.02 at the break, following a more than 5 per cent surge in the final hour of trading on Thursday. The gauge is still down 39 per cent from its June high.

Rout Overdone "There is a lot of talk of state-linked funds purchasing stocks and helping the market," said Gerry Alfonso, a Shanghai- based sales trader at Shenwan Hongyuan Group Co. "After the massive correction earlier in the week, investors are apparently starting to realise that the drop was overdone." The yuan gained 0.18 percent, the most since April 28, to 6.3935 per dollar in Beijing. The People's Bank of China's daily reference rate was set 0.15 per cent stronger at 6.3986. The onshore spot rate is allowed to trade as much as 2 percent on either side.

"The fixing was unexpected," said Irene Cheung, a currency strategist at Australia & New Zealand Banking Group Ltd in Singapore. "The depreciation pressure on the currency is still there, based on where it would trade without the official support." Earlier this week, the central bank announced an interest- rate cut for the fifth time since November and reduced banks' reserve requirements to support economic growth.

Policy makers want to stabilise shares before the military parade celebrating the 70th anniversary of the World War II victory over Japan, said two people familiar with the matter, who asked not to be identified because the intervention wasn't publicly announced.

Authorities had halted buying in the first two days of this week amid a debate over the rescue programme's effectiveness, according to people familiar with the matter. The China Securities Regulatory Commission didn't respond to a faxed request for comment.

The revived effort to support markets is part of a broader push to ensure nothing detracts from the parade, which the government will use to demonstrate its rising military and political might. The event has been planned for months and will provide President Xi an opportunity to publicly present himself to the world as China's commander in chief.

While China's stocks may rebound in the short term, the worst is most likely not over, David Cui, China equity strategist at Bank of America Corp. in Singapore, said in a media conference call on Friday.

What happens in China's stock market has had a growing influence on public perceptions of the leadership's economic management since millions of Chinese traders opened stock accounts over the past year. Encouraged by a series of articles in state-run media that endorsed equity investment, more than 90 million individual investors now have stock accounts, a constituency that's bigger than the Communist Party.

Equities on mainland bourses traded at a median 50 times reported earnings on Thursday, according to data compiled by Bloomberg. That's the most among the 10 largest markets and more than twice the 19 multiple for the Standard & Poor's 500 Index.

BLOOMBERG