China Stock Selloff Abates on State Efforts to Stabilize Yuan 

The Shanghai Composite Index added 0.6 percent to 3,034.20 at 1:11 p.m. local time, after losing as much as 1.3 percent. Technology and financial shares led gains. The Chinese currency rose to a one-week high in offshore trading, almost erasing its discount to the onshore rate, after the central bank steadied the currency’s daily fixings and intervened to support the exchange rate.

While the government helped boost stocks at least twice last week, according to people familiar with the matter, equities extended declines into the close on Monday. Even if state funds come in to defend the 3,000 level, it may not ultimately work, according to Michael Every, head of financial markets research at Rabobank Group in Hong Kong.

“Everyone rational wants to sell, while everyone official has been told to buy,” said Every. “By throwing good money after bad, it just delays the inevitable.”

After three daily declines of at least 5 percent for the Shanghai index since the start of the year, its relative strength index has fallen to 27 as of Monday, the lowest level since August, and below the 30 threshold signifying oversold conditions. The stocks gauge has slumped 15 percent in 2016, the world’s worst-performing global index, amid speculation policy makers will allow the yuan to weaken and the economic slowdown is deepening.

The yuan traded in Hong Kong rose 0.39 percent to 6.5876 a dollar, according to prices compiled by Bloomberg. The currency in Shanghai weakened 0.07 percent to 6.5741, leaving a spread of 0.1 percent. That’s compared with a record 2.9 percent reached last week.

Chinese officials have started to push back against views the nation’s currency is on a one-way weakening path. Betting against the yuan will fail and calls for a large depreciation are “ridiculous” as policy makers are determined to ensure the currency’s stability, Han Jun, the deputy director of China’s office of the central leading group for financial and economic affairs, said at a briefing in New York on Monday.

Investors have misunderstood the People’s Bank of China’s intentions in its recent moves on the reference rate, according to Ma Jun, chief economist at the central bank’s research bureau. The fixings are based on the previous day’s closing price and changes to the basket of currencies against which the yuan is valued, the PBOC’s Ma said.

Investors will return to stocks once they realize the government is consistent in its message, Lu Wenjie, equity strategist at UBS Group Inc., said in an interview on Monday. The downturn won’t last very long and investors shouldn’t sell at current levels given the government’s arsenal of policy tools, he said.

Bear Market

The CSI 300 Index rose 1.1 percent, led by technology and financial stocks. Han’s Laser Technology Industry Group Co. jumped 5.5 percent. Founder Securities Co., GF Securities Co. and Guoyuan Securities Co. rallied at least 2.9 percent after they estimated that profits at least doubled last year.

Hong Kong’s Hang Seng China Enterprises Index advanced 0.5 percent, while the Hang Seng Index climbed 0.1 percent. The Shanghai index’s 10-day volatility hovered around the highest levels since September as trading volumes slipped 2.8 percent below the 30-day average for this time of day.

Even as Monday’s inflation reading suggests there’s room to act, government signals give reason to pause: Policy makers wouldn’t seek strong stimulus or flood the economy with too much investment to boost demand, Beijing News cited Premier Li Keqiang as saying.

The Shanghai Composite may fall further and enter a bear market before rebounding at around the 2,900 to 3,000 level, according to Hao Hong, equity strategist at Bocom International Holdings Co. in Hong Kong.

“Another day it will be there,” Hong said in an interview in Shanghai. “It’s not surprising at all with all the volatility in the currency market. Once we sink below 3,000 points, we’ll probably have a technical rebound again.”