A shock devaluation by China last August led to a similar global selloff in stocks, which forced China to enact emergency measures to stem the capital flow out of Chinese equities. The local currency rose to 4.3789 yuan from 4.3744 yuan yesterday. And one of the key illustrations of that problem can be found in its currency, the yuan. This means they are allowing the currency to be more market-driven.
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But the snowball effect of a sinking currency is picking up momentum. The PBOC now wants to maintain stability in the yuan index and not versus the USA dollar.
“They thought: When the market is not looking at you, when other currencies were in the firing line, then you devalue a little, and use the reserves (to stabilize that move)”, he said. Elsewhere in Asia, the only countries whose currencies depreciated in double-digits were Indonesia and Malaysia by just over 10 per cent and 18 per cent respectively. However, the official non-manufacturing PMI for December was at 54.4, up from November’s 53.6.
“This is key, and traders feel this portrays more CNY weakness to come and therefore additional strain on the global economy, not to mention corporate China”. A bit friend and foe. Because the offshore currency is now trading at a significant discount to the onshore one. Its exports become cheaper, and more attractive, to foreign buyers.
“Emerging markets will react negatively”, says Ihab Salib, head of global fixed income at Federated Investors. “Companies will remain cautious in their outlook when they present Oct – Dec 2015 earnings”, said Hannah Cunliffe, senior portfolio manager at Union Investment in Frankfurt.
Among commodities, oil prices rebounded in Asian trading hours following geopolitical tensions in the Middle East following Saudi Arabia’s execution of a prominent Shi’ite Muslim cleric, leading to Riyadh cutting its ties with Iran.
Authorities lowered the yuan’s central rate against the greenback by 0.51 per cent to 6.5646, the weakest since March 2011.
China’s central bank has said that it is capable of keeping the yuan “basically stable at a reasonable equilibrium level” in spite of “speculating forces”.
The country’s International Monetary Fund (IMF) reserve position fell from $4.60 billion to $4.55 billion.
Investors have been piling into safe-haven assets such as the yen as concerns mount about the extent of a slowdown in China after weaker-than-expected data on the manufacturing and services industries, a slump in the country’s stock market and devaluation of the yuan.
And it’s important to remember that the yuan isn’t tanking. After last year’s good performance we were bound to see a pull-back. Currencies of Brazil, Russia, Turkey and South Africa have all slid by double digits over the year.
“But the control mechanism has been weakened much further, and there’s been a buildup of sentiment in the market that the currency should go down further”.
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That raised concerns that China might be aiming for a competitive devaluation to help its struggling exporters.
