Stocks, oil stabilise after new year nightmare

That left dealers at a loss to know what the central bank might do at Friday’s fixing. Panicked investors have aggressively sold the currency, believing it will be worth less tomorrow.

The mood was similarly cautious in currency and bond markets, with the yuan’s accelerated fall dragging down other emerging currencies like the Malaysian ringgitand Thai baht and the Aussie and Kiwi dollars.

New Zealand, Australia and Canada’s currencies are among those bearing the brunt of the disruptions in China, a key buyer of those nations’ commodity exports, with the Aussie suffering the worst start to a year since it began trading freely three decades ago.

“The fixing today flags China’s policy risks”, said Ken Cheung, a Hong Kong-based strategist at Mizuho Bank Ltd. “It looks like that they set it in an arbitrary way and the mechanism is not consistent with their policy guidelines”. 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.

The tumult, and the central bank’s response, have fueled a crisis of confidence that spilled over into stock markets in China and around the world.

However, BNP Paribas said the decline is only a short-term one. The local currency rose to 4.3789 yuan from 4.3744 yuan on Thursday.

China’s foreign currency stockpile shrank to $3.3 trillion last month, the central bank said Thursday.

“We have more serious issues like the Chinese economy and tension in the Middle East”, said Yoshinori Shigemi, a global market strategist for JPMorgan Asset Management in Tokyo.

After a 10 per cent-plus drop in Chinese equities, an equally dramatic slump in oil and major volatility in other markets, a two per cent rise by Chinese shares ensured Asia end higher for the first time in 2016. In August, it surprised investors by changing the way the yuan’s daily “fix”, or trading limit, is set.

In early European trade London dropped 0.3%, Paris slipped 0.2% and Frankfurt also lost 0.2%. Stocks tanked as a result.

Yi made the statement hours after the International Monetary Fund announced that the yuan is eligible for joining its Special Drawing Rights (SDR) basket, alongside the dollar, the euro, pound and yen. It would also encourage domestic investors to move more money out of China.

The circuit-breaker was just one in a series of attempts from authorities in Beijing to control the markets, which have reportedly cost China’s leaders $1trn (£686.66bn) in the previous year.

“They’ve got to find a new way if they want to alleviate concerns about these market crashes”, said Andrew Sullivan, the managing director at Haitong International Securities. “China is a command economy but you can not have a command stock market”.