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China stocks drop despite inflation data

China-style volatility spread to Japan stocks on Thursday, with the Nikkei Stock Average leading the rest of the region lower, as the U.S. Federal Reserve wavered on a September rate increase.

The Nikkei Stock Average dropped 3%, reversing a 7.7% jump the previous day, which was its biggest daily gain in nearly seven years.

The Malaysian ringgit and Indonesian rupiah hit fresh 17-year lows, as the currencies got caught up in a broad emerging-markets selloff.

The declines Thursday extended a series of swings over the past week, with two uncertainties prevailing in markets: the U.S. Federal Reserve’s timing on raising interest rates and China’s ability to shore up its market.

Asian share markets have struggled to rebound from August’s lows. While the Chinese market is up since late last month, the Nikkei, now near its lowest levels since February, is turning increasingly volatile.

The immediate concern for investors is the U.S. Federal Reserve’s meeting next week, when officials are expected to debate the timing of the first U.S. interest rate rise in nearly a decade. Recent comments suggest Fed board members are divided about a September rate increase, and the recent selloff in global markets has fueled expectations of a delay for some investors.

“You’re going to have these whippy markets” in the short term, said Chris Weston, market analyst at IG, adding that “markets may be dictating the Federal Reserve.”

On Thursday, Japan shares returned to losses despite encouraging comments from Bank of Japan Governor Haruhiko Kuroda saying the government would continue with its current easing program until inflation stabilizes at 2%. He said that inflation may not reach that level until around autumn next year, depending on oil prices.

The Nikkei surged yesterday as a rally in China and bullish comments from Japanese Prime Minister Shinzo Abe triggered a squeeze on short positions.

But “people are questioning whether the [recent] rally was a byproduct of a genuine change in sentiment,” said Mr. Weston.

Overnight, the S&P 500 lost 1.4%, with traders saying that back-and-forth action—with major markets leading each other in big gains or losses—is likely to continue at least until the Federal Reserve’s decision.

Chinese shares came off their morning lows, after official data showed China’s consumer inflation accelerated in August, having risen 2% from a year earlier, compared with a 1.6% rise in July. Economists expected a 1.9% gain.

The key takeaway for investors was that the rise wouldn't prevent China’s central bank from further monetary easing, a positive for markets. “Despite the pickup, the CPI figure still is not a threat for Beijing to change its policy stance, especially when factory-gate prices remain in the deflationary territory. China’s central bank is expected to keep easing its monetary policy throughout the year,” said Fan Zhang, an economist with RHB Research.

Chinese Premier Li Keqiang also said Thursday that China had capacity to achieve major economic targets this year. “The Chinese economy will not have a hard landing,” said Mr. Li in a speech at the World Economic Forum in the northeastern city of Dalian.

Still, China shares fell amid continuing worries about economic growth. Analysts added that concerns about government crackdown on illegal margin loans was pushing down brokerage stocks, taking benchmark indexes down with them.

Late Wednesday, China Minzu Securities revealed it was under investigation for improper accounting of 2 billion yuan of trading, and suspended the broker’s proprietary trading business. Authorities have been investigating illegal margin loans at brokerages since July, with efforts picking up this month. The stock regulator on September 2 fined three online firms for providing a platform for illegal loans for share trading and analysts say it has given brokerages until the end of the month to clear all illegal margin loans.

“Brokers are under regulatory pressure to clear illegal accounts, which may lead to greater volatility before those funds are cleared,” said Deng Wenyuan, analyst at Soochow Securities. “Market sentiment may have been lifted slightly, but there’s still a long way from turning positive.”

On Thursday, Western Securities fell 3.4% at 17.54 yuan and Guosen Securities was down 3.3% at 16.24 yuan.

Elsewhere, shares in New Zealand were flat after the Reserve Bank of New Zealand cut its key interest rate Thursday as expected and left the door open to further easing.

South Korea’s Kospi was off 0.5% and the S&P ASX 200 was off 2.3%.

The U.S. dollar traded as high as 4.3750 Malaysian ringgit. The ringgit is down by about a quarter this year.

The Australian dollar rose back above US$0.70 after news of better-than-expected employment data for August. Total employment grew by 17,400, compared with an expected increase of 8,000 for the month.

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