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China stuns financial markets by devaluing yuan for second day running China stuns financial markets by devaluing yuan for second day running
(35 minutes later)
China stunned the world’s financial markets on Wednesday by devaluing the yuan for the second day running, sparking fears that the world’s second largest economy is in worse shape than investors believed. China stunned the world’s financial markets on Wednesday by devaluing the yuan for the second consecutive day, triggering fears that the world’s second largest economy is in worse shape than investors believed.
The currency hit a four-year low on Wednesday after the People’s Bank of China set the yuan’s daily midpoint even weaker than in Tuesday’s devaluation. The move sent fresh shockwaves through global markets, pushing shares sharply lower and sending commodity prices further into reverse as traders feared the move could ignite a currency war that would destabilise the world economy.
There were widespread losses in Asia and in Europe stock markets suffered falls of about 1%, with the FTSE 100 tumbling almost 2% at one stage.
The Chinese currency hit a four-year low on Wednesday after the People’s Bank of China set the yuan’s daily midpoint even weaker than in Tuesday’s devaluation.
Related: Market slide as China moves to weaken yuan again - liveRelated: Market slide as China moves to weaken yuan again - live
With the bank having said that Tuesday’s move was a “one-off depreciation”, the rapid drop in the value of China’s currency – around 4% in the last two days – dealt a blow to appetite for risky assets, and markets across the region plunged amid concerns that Beijing has embarked on a damaging currency war. With the bank having said that Tuesday’s move was a “one-off depreciation”, the rapid drop in the value of China’s currency – about 4% in the past two days – dealt a blow to appetite for risky assets, and markets across the region plunged amid concerns that Beijing has embarked on a damaging currency war.
Stocks, currencies and commodities came under heavy pressure as money managers feared it could ignite a currency war that would destabilise the global economy. The unexpected yuan devaluation saw Chinese stocks slump in Hong Kong, with the Hang Seng China Enterprises Index sliding 2.6%, extending its loss this quarter to 15%. The Shanghai Composite Index lost 1% to 3,886.32 and the CSI300 index of the largest listed companies in Shanghai and Shenzhen fell 1.2% to 4,016.13 points.
The Nikkei stock market index in Japan was down more than 1% while the Hang Seng in Hong Kong was down 1.64%. Shares in airlines were hit particularly hard as investors feared a weaker yuan would contribute to higher fuel bills. Air China lost 4.4% while rivals China Eastern and China Southern dropped close to 6%.
The Australian dollar, often seen as a proxy for the Chinese economy, fell again to a fresh six-year low of US$72.25c, having been sold off heavily on Tuesday. The US dollar, on the other hand, rose strongly again against all Asian currencies. Contributing to the slump were worse than expected economic figures with fixed-asset investment falling short of expectations. The crucial gauge on the country’s growth came in at 11.2% for the first seven months from the same period last year, acording to official data. Economists had forecast a rise of 11.5%.
Oil was hit, too, with Brent futures were down 31c at $48.87 per barrel at 0251 GMT. US crude was trading at $43.02 per barrel, down 6 cents from Tuesday when it marked its lowest settlement since March 2009. Key industrial and construction materials nickel, copper and aluminium also hit six-year lows. China’s factory output for July also missed expectations, coming in at 6% year-on-year growth instead of the 6.6% expected. Adding to the slew of bad data was retail sales for July, which amounted to approximately 2.43tn yuan, up 10.5% from June, but also short of market expectations of a 10.6% rise.
“China’s currency moves will hurt appetite for risky assets such as equities and commodities,” said Rajeev De Mello, head of Asian fixed income at Schroders in Singapore. The Nikkei stock market index in Japan fell 1.6%; South Korea’s Kospi was down 0.56%.
The Australian dollar, often seen as a proxy for the Chinese economy, fell again to a fresh six-year low of US$72.25c, having been sold off heavily on Tuesday. The US dollar, on the other hand, rose strongly again against all Asian currencies. Key industrial and construction materials nickel, copper and aluminium hit six-year lows.
“China’s currency moves will hurt appetite for risky assets such as equities and commodities,” Rajeev De Mello, head of Asian fixed income at Schroders in Singapore, said.
Related: Chinese yuan: everything depends on what happens nextRelated: Chinese yuan: everything depends on what happens next
“While it is too early to say whether this is the beginning of a sustained devaluation of the yuan, other central banks may be forced to follow suit and that may trigger a fresh round of currency weakening around the emerging world.”“While it is too early to say whether this is the beginning of a sustained devaluation of the yuan, other central banks may be forced to follow suit and that may trigger a fresh round of currency weakening around the emerging world.”
Wall Street was already reeling from Tuesday’s devaluation, with the Dow falling 1.2% and the S&P 500 a similar amount. More selling is expected when European and US markets open later on Wednesday.
Spot yuan fell to 6.43 per dollar, its weakest point since August 2011, after the central bank set its daily midpoint reference even weaker than Tuesday’s devaluation. The currency fared worse in offshore trade, touching 6.57.Spot yuan fell to 6.43 per dollar, its weakest point since August 2011, after the central bank set its daily midpoint reference even weaker than Tuesday’s devaluation. The currency fared worse in offshore trade, touching 6.57.
The central bank, which had described the devaluation as a one-off step to make the yuan more responsive to market forces, sought to reassure financial markets on Wednesday that it was not embarking on a steady depreciation.The central bank, which had described the devaluation as a one-off step to make the yuan more responsive to market forces, sought to reassure financial markets on Wednesday that it was not embarking on a steady depreciation.
“Looking at the international and domestic economic situation, currently there is no basis for a sustained depreciation trend for the yuan,” the PBoC said on Wednesday.“Looking at the international and domestic economic situation, currently there is no basis for a sustained depreciation trend for the yuan,” the PBoC said on Wednesday.
Tuesday’s devaluation followed a run of poor economic data and raised market suspicions that China was embarking on a longer-term slide in the exchange rate. It was the biggest one-day fall in the yuan since a massive devaluation in 1994.Tuesday’s devaluation followed a run of poor economic data and raised market suspicions that China was embarking on a longer-term slide in the exchange rate. It was the biggest one-day fall in the yuan since a massive devaluation in 1994.
A cheaper yuan will help Chinese exports by making them less expensive on overseas markets. Last weekend, data showed an 8.3% drop in exports in July and that producer prices were well into their fourth year of deflation.A cheaper yuan will help Chinese exports by making them less expensive on overseas markets. Last weekend, data showed an 8.3% drop in exports in July and that producer prices were well into their fourth year of deflation.
Related: Why has China devalued its currency now and what impact will it have?Related: Why has China devalued its currency now and what impact will it have?
More indicators due on Wednesday for factory output, retail sales and fixed-asset investment are expected to underline sluggish growth in the world’s second-largest economy.
The International Monetary Fund said China’s move to make the yuan more responsive to market forces appeared to be a welcome step and that Beijing should aim to achieve an effectively floating exchange rate within two to three years.The International Monetary Fund said China’s move to make the yuan more responsive to market forces appeared to be a welcome step and that Beijing should aim to achieve an effectively floating exchange rate within two to three years.
Beijing has been lobbying the IMF to include the yuan in its basket of reserve currencies known as Special Drawing Rights, which it uses to lend to sovereign borrowers. This would mark a major step in terms of international use of the yuan. Beijing has been lobbying the IMF to include the yuan in its basket of reserve currencies, known as Special Drawing Rights, which it uses to lend to sovereign borrowers. This would mark a major step in terms of international use of the yuan.
“Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets,” an IMF spokesperson said in an emailed statement. “Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets,” an IMF spokesperson said.