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 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.
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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.
A sustained depreciation in the yuan puts pressure on other Asian
countries to weaken their currencies to stay competitive with
China's massive export machine.
It also makes commodities denominated in U.S. dollars more expensive
for Chinese buyers, which could hurt demand and thus further depress
commodity prices in a vicious chain reaction.
Equities markets were also notable and immediate casualties,
especially domestic Chinese shares.
Shanghai stocks slid 7.3 percent to trigger the halt in trading, a
repeat performance of Monday's sudden tumble. Japan's Nikkei shed
2.3 percent in sympathy, and Hong Kong's Hang Seng Index was down
2.8 percent.
The halt mechanism, intended to calm market volatility, was having
the opposite effect, according to a 22-year-old retail investor in
Guangzhou surnamed Hu.
He said he bought shares on Wednesday when the market rebounded, but
was now trapped by the circuit breaker, which he said was "killing
investors" and creating panic.
China's securities regulator also unveiled new rules on Thursday to
restrict selling by big shareholders who have been locked into their
holdings for six months since Beijing banned them from offloading
stocks to arrest a summer market crash.
In rules that take effect on Jan. 9, they can't sell more than 1
percent of a listed company's share capital every three months.
The new rules didn't go down well with investors.
"This is crazy. Chinese regulators set off on this path in July and
they cannot get out of it. They have ruined whatever hope investors
still had in the market," said Alberto Forchielli, founder of
Mandarin Capital Partners.
(Reporting by Lu Jianxin and Samuel Shen in Shanghai and Patrick
Graham in London; Additional reporting by Lisa Jucca and Masayuki
Kitano; Writing by Wayne Cole and Will Waterman; Editing by Hugh
Lawson)
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