China markets face make-or-break day as policy dumbfounds

European stock markets plunged in morning deals following a heavy sell-off across Asia triggered by a suspension to trading in China, the world’s second biggest economy and key driver of commodities consumption.

In addition to the central bank’s determination to keep the yuan stable, the conditions are there for the currency to stay basically stable, said the article, citing the steady overall economy.

The tumult in markets and China this week has so far led investors 0#FF: to wager on even less tightening this year, one factor undermining the dollar.

Europe initially followed suit, with the FTSE, DAX and CAC40 up as much as 0.5 per cent, but they later gave up their gains. At one point, it fell to around ¥117.70.

The drop was the biggest since August when the value was cut by five percent in a week – sparking weeks of global market turmoil over worries Beijing did not have a handle on its economic crisis. And in spite of Friday’s recovery, China’s markets finished the week some 10 percent down on Monday’s opening, declining to their lowest level in several months.

“The fact that we’re seeing the Bank of China weaken its currency at a record rate makes people think that economy is far worse than feared”.

So now officials are left with a conundrum – slowing exports because of a weaker manufacturing base, and services disappointing too. Both have been hit by a strong dollar and anaemic global demand.

The greenback was also weighed down after the Federal Reserve’s December policy meeting minutes suggested further US rate increases would be gradual because of concerns about persistently low inflation.

Equities markets were also notable and immediate casualties, especially domestic Chinese shares.

The euro rebounded from a near nine-month low against the yen.

This intervention has also left a dysfunctional market where investing is simply knowing which day or stocks the government is buying, meaning many investors, particularly institutions can not participate. The euro was up 0.4 percent at $1.0824 EUR= with the dollar on the back foot.

Friday’s turnaround came after China’s central bank nudged the yuan/dollar rate up to 6.5636 per dollar.

To restructure without triggering mass bankruptcies and redundancies, sources said the PBoC is being encouraged to let the yuan fall, keeping downward pressure on interest rates and relieving some of the debt servicing burden on businesses. Japan’s Nikkei was 0.4 per cent higher, while Hong Kong’s Hang Seng rose 0.9 per cent. Australia’s S&P/ASX 200 was down 0.6 per cent in afternoon trading in Sydney.

The benchmark US Treasury yield edged up after touching its lowest since late October.

Though much could depend on the 1330 GMT payrolls figures, Wall Street, which opens at 1430 GMT, was expected to see a small bounce after a five percent fall this week.