China’s CSI 300 Index plunged 7.2% before trading was halted by automatic circuit breakers, while the onshore yuan weakened 0.6% versus the dollar to a five-year low. The People’s Bank of China cut its reference rate on Thursday by the most since August, fueling concern that tepid economic growth is prompting authorities to guide the currency lower.
While a weaker yuan would support China’s flagging export sector, it also boosts risks for the nation’s foreign-currency borrowers and heightens speculation that the slowdown in Asia’s biggest economy is deeper than official data suggest. An unexpected yuan devaluation in August roiled global markets on concern the move would fuel a currency war and exacerbate deflationary pressures in the developed world.
“This is insane,” said Chen Gang, chief investment officer at Shanghai Heqi Tongyi Asset Management Co., which manages about 300 million yuan ($46 million). “We liquidated all our holdings this morning” after stocks hit stop-loss levels, he said.
The CSI 300 extended this year’s decline to 12%. Under circuit breakers that became effective Monday, a move of 5% in the index triggers a 15-minute halt for stocks, options and index futures, while a move of 7% closes the market for the rest of the day.
The yuan weakened 0.6% to 6.592 per dollar at 10:36 a.m. local time in Shanghai. The currency rallied from early declines in offshore trading, strengthening 0.4% in Hong Kong amid suspected intervention.
“The yuan’s depreciation has exceeded investors’ expectations,” said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co. “Investors are getting spooked by the declines, which will spur capital outflows.”
The People’s Bank of China has been burning through its foreign-exchange reserves to prop up the yuan, with the stockpile recording its first-ever annual decline last year, as the central bank sold dollars in both the onshore and offshore markets. The support has been more sporadic since early December after China succeeded in persuading the International Monetary Fund to admit the yuan into its reserves basket.
China is due to report foreign-currency reserves on Thursday, with the median estimate in a Bloomberg survey predicting a $23 billion decline in December. Government data next week are forecast to show Chinese exports shrank for a sixth straight month in December. The private Caixin Media and Markit Economics Chinese services gauge fell to a 17-month low, according to a report released Wednesday.
“There have been a lot of concerns lately about the economy, with the data coming rather soft,” said Gerry Alfonso, a trader at Shenwan Hongyuan Group Co. in Shanghai. “The volatility in the FX market amplifies those macro concerns and that’s clearly not a positive for the stock market.”
©2016 Bloomberg News