Yen Rises as Yuan Slides Further

Besides currency issues, China’s stock markets trade was automatically suspended for the rest of the day only 29 minutes after opening due to a sharp 7 per cent fall. “China is a command economy but you can not have a command stock market”.

The yuan traded in Shanghai eased 0.07 per cent on Friday to 6.5878 per U.S. dollar, bringing its decline for the week to 1.48 per cent. The move, a scenario which none of the analysts in Bloomberg surveys expect, would lead to US$670 billion (S$963 billion) in capital outflows. “They’re now rapidly trying to goose up exports”, US Senator Marco Rubio of Florida told reporters on the campaign trail in New Hampshire.

It was the biggest drop since August, Bloomberg News reported, when Beijing guided the unit down by almost five percent in a week in a surprise devaluation. That rate had always been seen as a mechanism by which the central bank would control the currency against market pressure.

In reaction to that, the freely-traded off-shore yuan dropped to 6.6915 versus the greenback, its weakest level going back to the last quarter of 2010, resulting in a record spread between the on-shore and off-shore exchange rates.

Senior currency strategist at Credit Suisse Private Banking Asia-Pacific Heng Koon How, said: “You’ve noticed that since Christmas, the renminbi has been weakening at double-quick pace”. For example, the economy is stable, inbound and outbound direct investment are still growing, the country’s foreign reserves are sufficent, and overseas demand for yuan-denominated assets will gradually increase, the PBOC noted. How far and how fast could be the most pertinent questions. This is the reason majorAsian currencies are under big pressure.

As such, the PBOC appears to have largely tolerated the yuan’s weakness against the dollar since late November when the International Monetary Fund announced its admission of the currency into its benchmark Special Drawing Rights basket, leading to a 2.1 percent depreciation by Wednesday. China is the largest net oil importer. Since May, the country’s foreign currency reserves fell every month except one.

Weaker commodity prices would further weigh on inflation, already stubbornly low.

But a weaker yuan would also hurt developed nations like Germany, which see China as a key growth market. Those trading activities “have nothing to do with [China’s] real economy” and have only caused “abnormal fluctuations” in the currency, the central bank said.