(REUTERS) – China allowed the biggest fall in the yuan in five months on Thursday, 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 again surprised markets by setting the official midpoint rate on the yuan, also known as the renminbi (RMB), 0.5 percent weaker at 6.5646 per 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 percent devaluation of the currency also roiled markets.
Dealers, however, said the PBOC had intervened later to reverse a more than 1 percent fall in offshore rates for the yuan after they hit a record low of 6.7600 per dollar.
After opening in London, the offshore yuan had taken back all its losses to stand higher on the day at 6.6905.
“It’s very similar to the previous round (in August) where they weaken the official rate and then intervene against the dollar offshore to beat back the speculators,” said a yuan trader with one international bank in London.
“That would be a way of starting to stabilize the market.”
The PBOC’s China Foreign Exchange Trade System (CFETS) repeated on Thursday that there was no basis for the yuan’s continuous depreciation and that it was stable against a basket of currencies in 2015.
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.
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.
Others in the market were unsure what policy Beijing was pursuing.
“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).
“The fear of the unknown has become the largest risk for RMB in the near term, despite China’s sizable current account surplus.”
The Australian dollar, often used by foreign exchange dealers as a liquid proxy for the yuan, fell more than half a U.S. cent. The Korean won, however, recovered almost all of its initial falls with banks saying the Bank of Korea had probably also intervened to support the currency.
OCBC noted that against a basket of currencies, the RMB index was still only fractionally down for 2016, despite this week’s fixes against the dollar.
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”.
DECLINING RESERVES
Data on Thursday showed China’s foreign exchange reserves fell by the most on record last month, down $108 billion in December alone and by $513 billion overall last year.
That suggests an accelerating outflow of money from China which may largely be the result of the opening up of its financial markets over the past year, but also a sign that the world’s second-largest economy is in deepening trouble.
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.
“Why people are panicked is because (i) they didn’t see this coming, and/or (ii) the global economy needs a consumer of last resort, and China is sending a signal that they won’t be it,” he added.
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