Renminbi’s fall fuels fears of global market contagion

Declines came after China’s central bank lowered the ‘daily fix’ around which its currency trades against the US dollar

The People's Bank of China sought to dispel fears of a prolonged fall in the renminbi yesterday. The currency fell sharply for a second consecutive day, spreading alarm in global markets.

The renminbi’s decline to a four-year low weighed on equities and commodities, as fears grew that it could presage a global economic slowdown. The S&P 500 dropped 1 per cent to briefly turn negative for the year before steadying, while the FTSE Eurofirst 300 fell 2.7 per cent and stock markets slid across Asia.

China’s decision to tolerate a weaker currency has fanned fears its economy, long an engine of global growth, is slowing much faster than thought. Investors worry a sustained fall in the renminbi and competitive currency devaluations across Asia could have a deflationary effect and further weigh on global prospects.

Dependent on China

Investors are souring on European and US companies that are reliant on an expanding Chinese economy for their revenues, with shares in carmakers and luxury goods retailers falling sharply for a second day.

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Shares in UK fashion house Burberry, a particular favourite among Chinese consumers, fell 3.5 per cent.

The declines came after China’s central bank lowered the “daily fix” around which its currency trades against the US dollar by 1.6 per cent to 6.3306, the second-biggest one-day cut since the country abandoned its hard currency peg in 2005.

The move came a day after the PBoC surprised markets by devaluing the renminbi by nearly 2 per cent. After yesterday's move, the renminbi sank as low as 6.44 in onshore markets, its weakest level since 2011. A rebound took it back to 6.38 at the close of business, sparking talk Beijing had intervened to slow the decline.

The PBoC issued a statement reiterating its promise to give the market a larger role in setting the rate. But it dismissed concerns China was embarking on a campaign to weaken its currency in the face of stalling economic growth.

“In view of both domestic and international economic and financial condition, currently there is no basis for persistent depreciation of [the] renminbi,” the statement said.

“Recently, major economic indicators stabilised and showed good signs, which provides a favourable macroeconomic environment for a stable renminbi.” – Copyright The Financial Times Limited 2015