China’s Haphazard Attempts to Calm Markets Are Backfiring

China’s currency keeps losing value, sparking debate about a global “currency war”.

Regional currencies promptly went into a tailspin.

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

On Thursday, authorities lowered the yuan’s central rate against the United States dollar by 0.51 per cent to 6.5646, the lowest since March 2011.

China’s central bank lets the yuan spot rate rise or fall a maximum of 2 percent against the dollar, relative to the official fixing rate.

That raised concerns that China might be aiming for a competitive devaluation to help its struggling exporters.

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 in a report.

The outlook for Asian currencies is slightly better than that of other emerging currencies such as the Brazilian real, South African rand and Turkish lira.

“The global and domestic financial situation remains complicated and severe”, the People’s Bank of China (PBoC) said.

This week’s slide comes ahead of the expected release later in the day of China’s foreign exchange reserve data for December, which traders fear will show a further sharp decline as investors pull money out of the slowing economy. After the market close yesterday, the PBoC said China’s foreign exchange reserves decreased $108 billion to $US3.3 trillion in December, well above the street expectation of $US23 billion outflow and November’s $US87 billion outflow.

The New Zealand dollar fell as the suspension of trading on Chinese share markets for a second time this week stoked fears about the strength of the world’s second-biggest economy and the impact on its trading partners.

Oil prices rebounded from plunges earlier in the day, when Brent crude sank more than 6 per cent to an nearly 12-year low of $US32.16.

“The two main drivers are China and oil”.

Authorities were allowing the yuan to “move more flexibly”, Societe Generale’s China economist Claire Huang told AFP.

On Friday, the Shanghai Composite closed up 1.98 percent after trading down as much as 1.89 percent and up as much as 3.32 percent shortly after the market open. Japan’s Nikkei shed 1.8 per cent in sympathy.

The halt mechanism, meant to calm market volatility, was having the opposite effect, according to a 22-year-old retail investor in Guangzhou surnamed Hu.

Dealers said that, rather than easing selling pressure, it boosted sell orders among investors who wanted to avoid being stuck with shares they did not want to hold.

The move may have exacerbated volatility in the country’s stock markets, which dropped precipitously over concern Beijing would loosen restrictions on the sale of company’s equities by major shareholders.

A gauge of major stock markets globally .MIWD00000PUS fell 1.4 percent.