Fears of Asian currency war

The Chinese yuan.

China has accelerated the depreciation of the yuan, sending currencies across the region reeling and domestic stock markets tumbling, as investors feared the Asian giant was kicking off a trade war against its competitors.

Trading on China's stock markets was suspended yesterday for the rest of the day, for the second time this week, as a new circuit-breaking mechanism was tripped less than half an hour after the open.

The People's Bank of China (PBOC) again surprised markets by setting the official midpoint rate on the yuan, also known as the renminbi (RMB), at 6.5646 per US dollar, the lowest since March 2011.

That was 0.5 per cent weaker than the day before and the biggest daily drop since last August, when an abrupt near 2 per cent devaluation of the currency also roiled markets.

Regional currencies promptly went into a tailspin. The Australian dollar, often used by foreign exchange dealers as a liquid proxy for the yuan, fell half a US cent in a blink.

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.

But the central bank's fixings have helped drive the yuan down not just against the US dollar this week, but also other major currencies, including a 3.5 per cent fall against the yen and 0.8 per cent against the euro.

The markets are struggling to determine what policy Beijing is pursuing.

ANZ bank said in a note: "The policy action will also create one-way expectation of RMB depreciation, propelling capital flight and leading to significant financial instability."

This week's slide came ahead of the release of China's foreign exchange reserve data for December, which traders feared would show a further sharp decline as investors pull money out of the slowing economy.

Some fear the yuan's slide suggests the world's second-largest economy is in deepening trouble, though for now economists say there has been no change in their expectations of a gradual but bumpy slowdown, with no hard landing.