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Yen gains as China jitters spark flight to safety

Hong Kong’s benchmark Hang Seng index tumbled 2.59% to 20,438.08 points about an hour after trading began in China on Thursday, while mainland China’s benchmark Shanghai Composite plummeted 7.32% to 3,115.89 points before officials put a halt on trading.

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The yen briefly retreated from its initial highs after China suspended its stock market circuit breaker mechanism, which is seen as a move to shore up investor confidence.

Indian Trade Minister Nirmala Sitharaman says the yuan’s fall will worsen India’s trade deficit with China.

This halfway house will not stand for long, and if the PBoC keeps fighting it, the central bank will just do even more harm to the Chinese economy and potentially also cause a major banking crisis.

The New Zealand dollar regained ground after China fixed the yuan reference rate marginally higher after eight straight days of cuts, easing concerns that the People’s Bank of China sees a weaker economy than many in the markets.

Thursday’s fix jolted markets, with the more freely-traded offshore yuan plunging to a record low of 6.7511 against the dollar and stock markets tumbling.

As China continues to run a current account surplus, a weaker exchange rate could help convert foreign earnings and inject more liquidity into the economy.

China’s total reduction past year was US$513 billion, its first annual decline, with economic growth expected to have slowed to its lowest pace in a quarter of a century.

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”.

Still, selling pressure could mount again if China’s foreign reserve data, due later in the day, shows large capital outflows out of the country.

Regional currencies promptly went into a tailspin.

Though China has moved to make the yuan’s value more broadly market-based, linking it to a basket of currencies rather than the dollar, “there remains considerable confusion in the market about what policy-makers’ true intentions are”, said Charles Collyns, chief economist at the Institute of International Finance.

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Forex investors fled to the traditional haven of the yen, which rose 0.7 percent against the greenback at 117.65 yen around 2200 GMT. Overseas shipment in China fell 6.8 percent in November, compared with a 6.3 percent drop in Taiwan and a 4.8 percent decline in South Korea. Average prices fell 1.6 percent in the GlobalDairyTrade auction overnight, with the price of New Zealand’s key product, whole milk powder, down 4.4 percent.

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