China shares rise sharply on signs of fresh government support

China stocks jumped more than 4 per cent for a second straight day on Friday as signs of fresh support from Beijing prompted more bargain hunting following the earlier plunge that panicked global markets.

The mainland’s blue-chip CSI300 index rose 4.3 per cent, to 3,342.29 points, reducing the week’s loss to 6.9 per cent.

The Shanghai Composite Index gained 4.8 per cent to 3,232.35 points, though for the week, it lost 7.9 per cent.

But a rally in Hong Kong petered out, with the flagship Hang Seng Index changing course before the closing bell and losing 1 per cent.

European stocks retreated with US equity- index futures and oil erased earlier gains as investors reassessed the outlook for markets in a week of volatile trading.

China’s central bank strengthened the yuan’s reference rate by the most in five months Friday.

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 $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 rallied 4.4 per cent to 3,219.96 at 2.42pm, following a more than 5 per cent surge in the final hour of trading on Thursday. The gauge is still down 38 per cent from its June high.

“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.

“After the massive correction earlier in the week, investors are apparently starting to realize that the drop was overdone.”

The yuan gained 0.18 per cent, the most since April 28, to 6.3938 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 per cent on either side.

“The fixing was unexpected,” said Irene Cheung, a currency strategist at Australia and New Zealand Banking Group 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.

Bloomberg