China Stocks Bounce Back as State Funds Said to Buy Equities

Chinese stocks bounce back after being pounded, the trading is very volatile after the Chinese government halt the controversial circuit breaker system, the central bank put up a higher yuan fix and state-controlled funds were said to buy equities.

The Shanghai Composite Index ended 2% higher, after falling as much as 2.2% earlier. The government suspendted the circuit breakers after plunges this week closed trading early on Monday and Thursday. The central bank set the currency’s reference rate little changed Friday after an 8-day stretch of weaker fixings that roiled global markets. State-controlled funds purchased Chinese stocks on Friday, focusing on financial shares and others with large weightings in benchmark indexes, according to people familiar with the matter.

Without the circuit breaker system it will help stabilize the market, but because of sense of panic that remains specially among retail investors it will be very volatile. The Government will have to continue to buy stocks significantly to stabilize the market.

While China’s high concentration of individual investors makes its stock-market notoriously volatile, the extreme swings this year have revived concern over the Communist Party’s ability to manage an economy set to grow at the weakest pace since 1990. The selloff has spread around the world this week, sending U.S. equities to their worst-ever start to a year and pushing copper to the lowest levels since 2009.

The CSI 300 Index of large-cap companies in Shanghai and Shenzhen advanced 2 percent. The Hang Seng China Enterprises Index climbed 1.7 percent from a four-year low at 3:22 p.m. as China Petroleum & Chemical Corp. led gains by energy companies, while the Hang Seng Index added 1.2 percent. The Shanghai Composite pared its weekly decline to 10 percent, its biggest loss since August.

China’s decision to suspend a stock circuit breaker makes sense, but the implementation and timing don’t, said Mohamed El-Erian, the chief economic adviser at Allianz SE. China realized that it had very tight limits, which did more harm than good, El-Erian said Thursday in an interview with Scarlet Fu on Bloomberg Television.

The Standard & Poor’s 500 Index has fallen 4.9 percent this year, its worst start in data going back to 1928. The MSCI All-Country World Index has tumbled 5.3 percent.

Trading in S&P 500 e-mini futures soared during Asia hours on Thursday, with volumes in the hour after 9 a.m. in Hong Kong more than six times their level during the same period on Monday, according to data compiled by Bloomberg. China releases the daily yuan reference rate around 9:15 a.m. Hong Kong time, and markets in that city and on the mainland start at 9:30 a.m.

Asian shares rebounded on Friday, led by strong gains for battered Chinese stocks after China suspended its market circuit breaker system and set a firmer midpoint rate for yuan trading for the first time in nine days.

The improved sentiment looks unlikely to spill over into Europe, however, with financial spreadbetters expecting Britain's FTSE 100 .FTSE to open flat, and Germany's DAX .GDAXI and France's CAC 40 .FCHI to start the day 0.5 percent lower.