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Global markets tumble as China lets yuan fall sharply

International Business
Fri, 08 Jan 2016

Shanghai: China allowed the biggest fall in the yuan in five months yesterday, pressuring regional currencies and sending global stock markets tumbling as investors feared the Asian giant could trigger competitive devaluations from its peers.

China’s stock markets were suspended for the day less than half an hour after the open as a new circuit-breaking mechanism was tripped for the second time this week.

The People’s Bank of China (PBOC) again surprised markets by setting the official midpoint rate on the yuan, also known as the renminbi (RMB), 0.5 per cent weaker at 6.5646 per dollar, the lowest since March 2011.

That tracked record losses in the more open offshore market in the currency and was the biggest daily fall since last August, when an abrupt near 2pc devaluation of the currency also roiled markets. Dealers, however, said the PBOC had intervened later to reverse a more than 1pc fall in offshore rates for the yuan after they hit a record low of 6.7600 per dollar.

After opening in London, the offshore yuan had taken back all its losses to stand higher on the day at 6.6905.

“It’s very similar to the previous round (in August) where they weaken the official rate and then intervene against the dollar offshore to beat back the speculators,” said a London yuan trader.

“That would be a way of starting to stabilise the market.”

The PBOC’s China Foreign Exchange Trade System yesterday repeated that there was no basis for the yuan’s continuous depreciation and that it was stable against a basket of currencies in 2015.

But the central bank’s fixings have helped drive the yuan down not just against the dollar this week, but also other major currencies, including a 3.5pc fall against the yen and 0.8pc against the euro.

That raised concerns that China might be aiming for a competitive devaluation to help its struggling exporters.

The Australian dollar, often used by foreign exchange dealers as a liquid proxy for the yuan, fell more than half a US cent. The Korean won, however, recovered almost all of its initial falls with banks saying the Bank of Korea had probably also intervened to support the currency.

ANZ bank said in a note that the PBOC’s action would nevertheless “create one-way expectation of RMB depreciation, propelling capital flight and leading to significant financial instability”.

Data yesterday showed China’s foreign exchange reserves fell by the most on record last month, down $108 billion in December alone and by $513bn overall last year.

That suggests an accelerating outflow of money from China which may largely be the result of the opening up of its financial markets over the past year, but also a sign that the world’s second-largest economy is in deepening trouble.

A sustained depreciation in the yuan puts pressure on other Asian countries to weaken their currencies to stay competitive with China’s massive export machine.

It also makes commodities denominated in US dollars more expensive for Chinese buyers, which could hurt demand and thus further depress commodity prices in a vicious chain reaction.

Equities markets were also notable and immediate casualties, especially domestic Chinese shares.

Shanghai stocks slid 7.3pc to trigger the halt in trading, a repeat performance of Monday’s sudden tumble. Japan’s Nikkei shed 2.3pc, and Hong Kong’s Hang Seng Index was down 2.8pc. 

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