China accelerated the depreciation of the yuan on Thursday, sending regional currencies and stock markets tumbling as investors feared the Asian giant could trigger competitive currency devaluations from trading partners.
China's stock markets were suspended for the day less than half an hour after opening as a new circuit-breaking mechanism was tripped for the second time this week.
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 dollar, the lowest since March 2011.
That was 0.5 percent weaker than the day before and the biggest daily drop since last August, when a near 2 percent devaluation of the currency 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 U.S. cent in a blink.
The PBOC's China Foreign Exchange Trade System (CFETS) repeated on Thursday 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 dollar this week, but also other major currencies, including a 3.5 percent against the yen and 0.8 percent against the euro.
That raised concerns that China might be aiming for a competitive devaluation to help its struggling exporters.
"That's the fear of the market," said Sim Moh Siong, FX strategist for Bank of Singapore, adding that it was a zero sum game as other currencies weakened in response, and the end result would be greater volatility.
Others in the market were unsure what policy Beijing was pursuing.
"Frankly speaking, we are still not quite sure where the PBOC boundary is at the current stage," said Singapore-based Oversea-Chinese Banking Corporation (OCBC).
"The fear of the unknown has become the largest risk for RMB in the near term, despite China’s sizable current account surplus."
OCBC noted that against a basket of currencies, the RMB index was still only fractionally down for 2016, despite this week's fixes against the dollar.
ANZ bank said in a note that the PBOC's action would nevertheless "create one-way expectation of RMB depreciation, propelling capital flight and leading to significant financial instability".
Indeed, a Reuters poll of fund managers, currency traders and analysts showed on Thursday that bearish bets on the yuan hit a near six-year high, denting sentiment towards most other emerging Asian currencies.
As if to demonstrate the pressure on the currency, China later released its foreign exchange reserve data for December, showing a $107.9 billion drop, the biggest monthly decline on record, and taking the total fall for 2015 to a record $512.7 billion.
China's reserves remain the world's largest, at $3.33 trillion, but some fear such data and the yuan's slide suggest the world's second-largest economy is in deepening trouble.
Michael Every, Rabobank's Head of Markets Research, Asia-Pacific, said once Beijing had won the diplomatic triumph of getting the yuan included in the International Monetary Fund's reserve currency basket in November, he expected policymakers would let it slip to cope with a slowing, deflationary economy.
"Why people are panicked is because (i) they didn't see this coming, and/or (ii) the global economy needs a consumer of last resort, and China is sending a signal that they won't be it," he added.
A sustained depreciation in the yuan puts pressure on other Asian countries to weaken their currencies to stay competitive with China's massive export machine.
It also makes commodities denominated in U.S. dollars more expensive for Chinese buyers, which could hurt demand and thus further depress commodity prices.
Equities markets were also notable and immediate casualties, especially domestic Chinese shares.
Shanghai stocks slid 7.3 percent to trigger the halt in trading, a repeat performance of Monday's sudden tumble. Japan's Nikkei ended down 2.3 percent in sympathy, and Hong Kong's Hang Seng Index shed 3.1 percent.
The halt mechanism, intended to calm market volatility, was having the opposite effect, according to a 22-year-old retail investor in Guangzhou surnamed Hu.
He said he bought shares on Wednesday when the market rebounded, but was now trapped by the circuit breaker, which he said was "killing investors" and creating panic.
China's securities regulator also unveiled new rules on Thursday to restrict selling by big shareholders who have been locked into their holdings for six months since Beijing banned them from offloading stocks to arrest a summer market crash.
In rules that take effect on Jan. 9, they can't sell more than 1 percent of a listed company's share capital every three months.
The new rules didn't go down well with investors.
“This is crazy. Chinese regulators set off on this path in July and they cannot get out of it. They have ruined whatever hope investors still had in the market," said Alberto Forchielli, founder of Mandarin Capital Partners.