Authorities lowered the yuan’s central rate against the greenback by 0.5% to 6.5646 (nearly Rs 65.30), the weakest since March 2011 on Thursday. The rate was set at 6.5636 per United States dollars prior to the market open, firmer than both the previous fix and Thursday’s closing quote. Top priority for the new deputy prime minister is stabilizing the won’s value and financial markets. On Thursday, it reportedly had intervened to defend the yuan in offshore trade, reversing a decline of more than 1 per cent that took it to a record low of 6.7600 per dollar.
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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 3.5 percent fall against the yen and 0.8 percent against the euro. China’s recent efforts at progressive devaluation of the yuan have already resulted in Vietnam and South Korea joining in competitive devaluation.
The Chinese currency is down 1.5 per cent against the U.S. dollar in fewer than four full days.
“Frankly speaking, we are still not quite sure where the PBOC boundary is at the current stage”, said Singapore-based Oversea-Chinese Banking Corporation (OCBC). That rate had always been seen as a mechanism by which the central bank would control the currency against market pressure. That surprised investors and further encouraged them to seek out safe-haven assets, such as Japan’s yen, and eschew risk-sensitive currencies such as the kiwi and Australian dollars.
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”. What’s unclear is how much further these devaluation go and its effect on global economies, and when it stops.
Michael Every, Rabobank’s Head of Markets Research, Asia-Pacific, said once Beijing had won the diplomatic triumph of getting the yuan included in the International Monetary Fund’s reserve currency basket in November, he expected policymakers would let it slip to cope with a slowing, deflationary economy. “China is a command economy but you can not have a command stock market”. China’s foreign- exchange reserves slid more than forecast in December, capping their first-ever annual decline, prompting speculation that authorities are selling dollars to prop up the currency.
Equities markets were also notable and immediate casualties, especially domestic Chinese shares.
The CSI300 index of major Shanghai and Shenzhen stocks was up 2.7 percent and the Shanghai Composite climbed 2.4 percent.
The pan-European FTSEurofirst 300 index .FTEU3 and the euro zone’s bluechip Euro STOXX 50 .STOXX50E index were down 2.4 percent and 1.8 percent respectively, having fallen more than 3 percent earlier in the session.
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Asian markets closed mixed on the last day of 2016’s first trading week, after a wild ride that saw the Chinese market shut down prematurely twice to stem rapid selloffs, oil prices falling to 12-year lows and the persistent volatility across the region.
