Is China sparking a global currency war?

The yuan moves suggest Beijing is trying to engineer a weaker currency to cushion the impact of slowing growth in its economy, a slowdown that many analysts believe is much more serious than official statistics indicate.

This is a problem with fiat currency, that is, currency not backed by anything other than the central bank or government that issues it. It’s prone to sudden losses of confidence and value, which tend to be self-reinforcing.

On the currency front, the People’s Bank of China has spent tens of billions of dollars of its foreign reserve holdings in recent months to bolster a falling yuan. China’s reserves are nearly triple the size of Japan’s total, which is the world’s second-biggest.

That was 0.5 percent weaker than the day before and the biggest daily drop since last August, when an abrupt near 2 percent devaluation of the currency also roiled markets.

In a statement on its website, the central bank said it was determined to keep the exchange rate stable to fend off speculative forces. “The market momentum or sentiment is more important”, Ding, who used to work for the International Monetary Fund, said.

China still has plenty in reserve – at least for now – and Beijing is willing to use it, making it a tricky business to bet against the PBOC, according to Louis Kuijs, head of Asia economics for Oxford Economics in Hong Kong.

The central bank’s strategy has backfired.

If ever proof were needed of how deeply financial markets are interconnected and dependent on investors’ “sentiment”, look no further than the worldwide tremors set off by a 1 percent fall in China’s currency this week.

“We’ve had a stabilisation in China overnight, but the question remains as to whether China’s economy is headed for a hard or soft landing”, said Richard McGuire, senior fixed income strategist at Rabobank.

It was the first time in nine sessions that the PBOC set a higher reference rate for the yuan, giving other regional currencies a breather.

Latin American currencies weakened far more sharply than most Asian currencies previous year, a factor that probably helped shape the differing perspectives between policymakers from these regions.

A flurry of Chinese economic data in the coming weeks is likely to show economic activity continued to slow in December, adding to concerns about the outlook for 2016.

Markets will remain wary of China’s currency goals, as mixed messages come from the central bank, which has repeatedly said it sees no basis for the currency to depreciate, while steering it gradually lower.

U.S. Republican presidential candidates have seized on the yuan’s slide to lambast China over policies they say are created to gain an advantage in trade.

That news put fresh pressure on many Apple suppliers in Asia, although the immediate focus is on the Chinese yuan and Chinese shares.