China central bank intervening to support yuan via state-owned banks: traders

The central bank has often tried to steer investors into seeing the yuan as a currency that fluctuates in both directions, much like the dollar, the yen or the euro, based on economic fundamentals. On the basis of trade, it is hard to argue China has any competitiveness problem or that there is any justification for devaluation.

Now that growth is slowing, the challenges multiply and Beijing’s ham-fisted handling of its stock market turmoil this week is eroding the image of China’s Communist Party leaders as a skilled managers. Also, that -5.3% decline is a lesser move than a handful of other world currencies over this period.

“Frankly speaking, we are still not quite sure where the PBOC boundary is at the current stage”.

There was little reaction to news that North Korea said it had carried out a nuclear test – its fourth since 2006 – compounding worries about China’s economy and tensions in the Middle East.

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. The yuan’s rise, the first in nine trading days, eased concerns about the currency’s stability.

The PBOC kept investors guessing as it supported the exchange rate from March to August, shocked global markets with its yuan devaluation in August and then spent billions of dollars to prop up the currency amid a successful bid to win reserve status at the International Monetary Fund on November 30. With China’s forex reserves falling by a massive $108 billion in December, China’s ability to stem the fall in the Yuan, while still substantial, may stand reduced. The gap between the yuan rate inside China and that for the currency traded offshore expanded, underscoring speculation the government faces pressure to devalue its currency to aid the economy. Demand for the precious metal has been bolstered as gyrations in global stock markets enhance its allure as a haven investment. Stocks in Shanghai slid 7.3 percent before authorities halted trading for the second time this week. Japan’s Nikkei shed 2.2 percent.

Hong Kong – Most Asian markets retreated Wednesday but Shanghai ticked higher after losing more than seven percent in the first two days of a volatile week for global investors. On Thursday, when the Yuan was pegged lower by half a per cent, the Chinese equity market was once again frozen at the lower circuit of 7%.

The China Securities Regulatory Commission (CSRC), for its part, announced it was planning new rules to further restrict share sales by major stakeholders in listed companies, and said it would further tweak the circuit breaker mechanism. Still, the markets aren’t ruling out further depreciation in the Yuan this year.

Veteran investor, George Soros, told Bloomberg News that the adjustment in China amounts to a crisis.

“This is insane. Chinese regulators set off on this path in July and they can not get out of it. They have ruined whatever hope investors still had in the market”, said Alberto Forchielli, founder of Mandarin Capital Partners.