China sets yuan currency level near five-year low

China is one of biggest markets for many global companies.

The yuan has been losing ground as the Chinese economy hit its slowest pace in a quarter century due to outstanding issues such as housing overhang and excess capacity. Investors were spooked Thursday when the government guided the tightly controlled currency sharply lower, in what was interpreted as a panicked effort to stimulate the economy by helping beleaguered exporters.

Indeed, retail investors who spoke to Reuters said they were steering clear of stocks, having already been burned by this week’s experience. While the stock market was reacting to the devaluation of the Chinese yuan instituted by the PBOC the halting of trading just compounded the situation instead of alleviating tensions.

The Chinese currency has been a legal tender in the country’s multi-currency system for two years but was not available for market transactions.

But its embattled tone signaled that trying to control markets has become a no-win game for Beijing – and an expensive one.

Until it becomes clear how China’s slowdown will affect the global economy and those across the world – investors remain nervous.

The People’s Bank of China (PBOC) also wrong-footed traders by reportedly intervening heavily to defend the yuan in offshore trade, reversing a decline of more than 1% that took it to a record low of 6.7600 per dollar. The Dow lost 1.5 percent, the tech-heavy Nasdaq dropped 1.1 percent and the S&P 500 fell 1.3 percent.

Another sharp drop came on Thursday, when the yuan rate fell to its lowest in about five years. Under China’s currency regime the yuan is allowed to deviate 2 per cent either side of the midpoint.

Analysts believe the yuan, or renminbi, will keep depreciating this year despite Beijing s tight grip on currency flows.

The yuan’s tumble this week on both onshore and offshore markets has sent currency investors scrambling for traditional safe havens like the yen, Swiss franc and to a lesser extent the euro. That may be a sign of a stricter adherence to the mechanism announced in August, when it said it will make the exchange rate more market-driven, according to Goldman Sachs. A sustained depreciation in the yuan puts pressure on other Asian countries to devalue their currencies to stay competitive with China’s massive export machine. In hindsight, that may have been the easy part.

The sudden breakdown in relations between Gulf rivals Saudi Arabia and Iran, over Riyadh’s execution of a Tehran-supported Shiite cleric, also added to market nervousness and the flood into the greenback.