The spread between onshore and offshore yuan hit its widest level in more than four years on Tuesday after the central bank was suspected to have intervened in the onshore market to support the currency.
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The People’s Bank of China offered the funds in the form of what are known as seven-day reverse repos on Tuesday at an interest rate of 2.25%, according to the statement.
“The PBOC’s offer of 130bn yuan (almost $20bn) of reverse repurchase agreements appears to have eased liquidity concerns in Chinese money markets and offered some layer of comfort for equity investors”.
“The central bank’s tolerance for a weaker yuan is much higher now as it wants to make the currency more market-driven”, said Xia Le, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA.
Stocks fell more than 2pc in early trade, prompting fears that exchanges were set for a second day of panic selling after a 7pc dive on Monday set off a new “circuit breaker” mechanism, suspending trade nationwide for the first time. The Shenzhen Composite closed down 1.86pc at 2,079.77 points.
The FTSE 100 made its worst start to a new year since 2000, closing down 2.4pc. “We have to see if this continues”.
The drop was caused by weak Chinese manufacturing data and escalating tensions in the Middle East.
Still, many think the market will remain under pressure as producers including the Organization of the Petroleum Exporting Countries (OPEC), Russia and the United States pump between 0.5-2.0 million barrels of oil every day in excess of demand.
The cautious mood towards riskier assets helped the Japanese yen, with the dollar falling below 119 yen for the first time since mid-October.
The safe-haven Swiss franc gained about 0.8 percent against both the dollar and the euro while the gold also rose 0.8 percent, to $1,069.30 per ounce.
The euro firmed 0.5% to $1.0915.
Investors are wondering how much further the U.S. Federal Reserve will raise rates this year after its first rate hike in nearly a decade last month.
Chinese manufacturing surveys showed that any hope for a recovery in the sector were premature, with factory activity contracting for a 10th consecutive month in December and at a faster pace than in the previous month.
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A reading above 50 indicates expansion, while a reading below 50 represents contraction.
