The People’s Bank of China guided its yuan fix rate higher to 6.5636 versus Wednesday’s 6.5646, a sign that the central bank is not willing to let its currency slide.
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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.
Regional currencies promptly went into a tailspin.
The Australian dollar, often used as a proxy for China-related trades, was last up 0.6 per cent at $0.7057.
On Thursday, Beijing’s decision to lower the yuan’s reference point against the dollar sparked frantic selling in Chinese stocks, with markets being suspended within 30 minutes after key indices tumbled more than seven percent.
That raised concerns that China might be aiming for a competitive devaluation to help its struggling exporters.
“That’s the fear of the market”, said Sim Moh Siong, FX strategist for Bank of Singapore, adding that it was a zero sum game as other currencies weakened in response, and the end result would be greater volatility.
“The fear of the unknown has become the largest risk for RMB in the near term, despite China’s sizable current account surplus”. “From today onward they may put a stronger emphasis on the basket’s movement against the dollar overnight, in a way that would strengthen the transparency of the new fixing mechanism introduced in August”.
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”.
China is grappling with a series of unappealing choices as it tries to calm investors unnerved by abrupt falls in its currency and another stock market rout.
China suffered biggest monthly drop in foreign exchange reserve in December, leading to largest annual drop ever.
NEW YORK – Shares on major exchanges fell for a sixth consecutive day on Thursday while crude prices bounced back from multi-year lows as volatile markets digested another move lower in the yuan and Chinese efforts to stabilise a sinking stock market.
A man rides a bicycle past the People’s Bank Of China headquarters in Beijing, Dec. 2, 2015. Another problem is that the weaker yuan makes it more expensive for China to import commodities (in USA dollars).
Equities markets were also notable and immediate casualties, especially domestic Chinese shares.
Shanghai shares tanked more than 7pc and trading was halted as the fall triggered a circuit breaker, despite recent supportive measures announced by Chinese authorities. The 19-nation currency jumped 1.4 per cent to US$1.0928 and rose 0.6 per cent to 128.58 yen.
“Emerging markets will react negatively”, says Ihab Salib, head of worldwide fixed income at Federated Investors.
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“But it was only a short-term patch, the government can’t buy stocks every time it falls like this and it is not good for the health of the market itself”.
