In an unusual commentary Wednesday, Xinhua, China’s state news agency, said the yuan’s continued depreciation against the U.S. dollar since August, was not something to be anxious about because “a multitude of factors underpin the Chinese currency in the medium and long term”.
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“The market’s reaction is something between curious and concerning”, Richard Scalone, co-head of foreign exchange at TJM Brokerage in Chicago said of the December U.S. payrolls report.
“That would be a way of starting to stabilize the market”.
That raised concerns that China might be aiming for a competitive devaluation to help its struggling exporters. The size of the market grew as Beijing wanted to internationalise its currency. The Aussie dipped to 0.7036 down 36 points, the kiwi fell to 0.6636 while the Canadian dollar is trading at 1.4101 against the U.S. dollar. Investors seem reluctant to invest in China, as a weaker yuan would increase their translation losses, to ultimately dilute profitability.
The Australian dollar, often used as a liquid proxy for Chinese trade, strengthened to $0.7054 after falling to a three-month low of $0.6981 on Thursday.
OCBC noted that against a basket of currencies, the RMB index was still only fractionally down for 2016, despite this week’s fixes against the dollar.
China’s foreign exchange reserves posted the sharpest monthly fall on record in December, official data showed Thursday.
Some analysts say that instead of defending the yuan at huge cost, the central bank should accelerate reforms to liberalize the currency.
Financial markets fear the yuan’s rapid depreciation may accelerate, which would mean China’s economy is even weaker than had been imagined, and could therefore spark another wave of competitive devaluations around Asia and in other key economies.
Markets regained some stability after the offshore yuan erased early losses of up to 1 percent after suspected intervention by the authorities. Germany’s DAX slid 2.3 percent, France’s CAC 40 gave up 1.7 percent, and Britain’s FTSE 100 lost 2 percent. While that’s 0.46 per cent stronger than the previous day’s effective close of 4.30pm in Shanghai (4.30pm, Singapore time), a gauge of dollar strength fell by about 0.4 per cent between then and the fixing’s release.
The “circuit-breaker” rule was triggered during the first 30 minutes of trading as the market remains highly volatile.
The move may have exacerbated volatility in the country’s stock markets, which dropped precipitously over concern Beijing would loosen restrictions on the sale of company’s equities by major shareholders.
The new rules Chinese authorities unveiled this week, which restrict selling by large shareholders, did not go down well with investors, and provided little tonic.
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“This is insane. Chinese regulators set off on this path in July and they can not get out of it. They have ruined whatever hope investors still had in the market”, said Alberto Forchielli, founder of Mandarin Capital Partners in Hong Kong.
