China weakens yuan, triggering stock sell-off
CHINA allowed the biggest fall in the yuan in five months yesterday, pressuring regional currencies and sending global stock markets tumbling as investors feared the Asian giant could trigger competitive devaluations from its peers.
China's stock markets were suspended for the day less than half an hour after the open, as a new circuit-breaking mechanism was tripped for the second time this week.
The People's Bank of China (PBOC) again surprised markets by setting the official midpoint rate on the yuan, 0.5 per cent weaker at 6.5646 per US dollar, the lowest since March 2011.
That tracked record losses in the more open offshore market in the currency and was the biggest daily fall since last August, when an abrupt near 2 per cent devaluation of the currency also roiled markets.
Dealers, however, said the PBOC had intervened later to reverse a more than 1 per cent fall in offshore rates for the yuan after they hit a record low of 6.7600 per US dollar.
After opening in London, the offshore yuan had taken back all its losses to stand higher on the day at 6.6905.
Equities markets were immediate casualties, especially domestic Chinese shares.
Shanghai stocks slid 7.3 per cent to trigger the halt in trading, a repeat performance of Monday's sudden tumble.
Japan's Nikkei shed 2.3 per cent in sympathy and Hong Kong's Hang Seng Index was down 2.8 per cent.
European stock markets followed Asia lower, with the pan-European FTSEurofirst 300 index down 2.3 per cent and the euro zone's blue-chip Euro STOXX index falling 2.5 per cent.
The new circuit breaker, designed to stem volatility in China's stock markets by halting trade when the market plunges, was making it worse, investors and analysts said.
Investors said the circuit breaker on the Shanghai and Shenzhen stock exchanges, which suspends trade for 15 minutes when the market falls 5 per cent and halts it for the day after a fall of 7 per cent, changes the way investors trade in a way that fires up selling pressure rather than cooling it. They said the trigger levels for the breaker, introduced on Monday, were too low and too close together to work effectively.
The central bank's fixings drove the yuan down not just against the US dollar, but also other major currencies, including a 3.5 per cent fall against the yen and 0.8 per cent against the euro.
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.