Chinese yuan weakens to nearly 5-year low

The picture is similarly gloomy on Wall Street, with the SP 500 losing 2.4 per cent on Thursday, with 40 per cent of the stocks in the benchmark trading 20 per cent or more off of their highs, the definition of a bear market.

As Bank of America Merrill Lynch pointed out, we can see this in the Chinese labor market, where the ratio between job seekers and job offers has increased.

Earlier, the PBOC set the midpoint of the yuan at 6.5646 against the dollar, 0.51% lower than the previous day’s rate, representing the sharpest fall in the daily fixing since the currency’s massive depreciation in mid-August. Yuan traded offshore also climbed to 6.6799 against the dollar, having plunged to as much as 6.7511 on Thursday.

The latest ructions reinforce the belief that officials are struggling to reconcile contradictory demands: promoting market forces while preserving stability; and rebalancing the economy while continuing to meet increasingly unrealistic growth targets.

PBOC repeated yesterday that there was no basis for the yuan’s continuous depreciation and that it was stable against a basket of currencies in 2015.

Sim Moh Siong, FX strategist for Bank of Singapore, is quoted as saying that the situation is “a zero sum game”, with other currencies weakened in outcome. Analysts believe Beijing is letting the renminbi, as the yuan is also known, fall but is finding it hard to control the speed of its descent because of speculative pressure in the offshore yuan market.

“This is key, and traders feel this portrays more CNY weakness to come and therefore additional strain on the global economy, not to mention corporate China”.

The Australian dollar, often used as a proxy for China-related trades, fell to a two-month low of $0.7025.

A flurry of Chinese economic data in the coming weeks is likely to show activity in the world’s second-largest economy continued to slow in December, adding to concerns about its economic outlook for 2016.

Other regional currencies followed suit.

But the dollar slipped to 118.71 yen, with the Japanese unit considered a go-to currency in times of turmoil and uncertainty.

“The lower yuan fixing probably signifies greater risks to the Chinese economy than we know of, leading to risk-off trades”, said Jeremy Stretch, head of currency strategy at CIBC World Markets in London.

Shanghai stocks slid 7% to trigger the halt in trading, a repeat performance of Monday’s sudden tumble. 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. That triggered another circuit breaker, prompting a suspension in trading for the remainder of the day. “Investors can buy and sell as they wish”.

“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.