[KUALA LUMPUR] Malaysia's ringgit fell the most in a week as China's record weakening in its daily reference rate spurred the biggest decline in the yuan in two decades and triggered losses across Asia.

China took the unprecedented step just days after data showed exports contracted in July for a fifth month this year, underscoring concern that the region's largest economy is slowing. Malaysia's currency is Asia's worst performer in the past 12 months as a slump in Brent crude weighs on the oil exporter's earnings. A political scandal involving the prime minister and a looming US interest-rate increase have sent the ringgit to a 17-year low, spurring capital outflows.

"This is some form of devaluation by China," said Sean Yokota, the Singapore-based head of Asian strategy at Skandinaviska Enskilda Banken AB. "There's downside risk to Chinese growth and that's generally negative for Asia." The ringgit retreated 0.8 per cent for a fifth day of losses to 3.9585 a dollar as of 4:08 pm in Kuala Lumpur, according to prices from local banks compiled by Bloomberg. It earlier fell to 3.96, the lowest level since August 1998, and is down 19 per cent in the past 12 months.

A government report on Thursday may show Malaysia's second- quarter economic growth slowed to 4.5 per cent from 5.6 per cent in the previous three months, according to the median estimate in a Bloomberg survey. That would be the slowest pace since early 2013.

Weaker currencies tend to support exports by making goods more competitive overseas and at the same time push up the cost of imports. Malaysia's shipments unexpectedly rose in June, increasing for only the second month this year. Brent crude prices have more than halved from 2014's peak to US$50 a barrel.

The ringgit dropped 1.4 per cent to 6.1766 versus the British pound and earlier fell to 6.2044, the weakest since 2008. It reached a record low of 2.8499 to the Singapore dollar.

As the ringgit dropped and the political scandal linked to state investment company 1Malaysia Development Bhd escalated, global investors cut holdings of Malaysian government and corporate debt by 2.4 per cent in July to RM206.8 billion (US$52 billion). That's the lowest level in three years.

Stocks funds pulled US$3 billion from the nation's equities in 2015, the most since 2008. The FTSE Bursa Malaysia KLCI Index has lost more than 12 per cent from this year's high in April.

Foreign-exchange reserves dropped below US$100 billion last month for the first time since 2010, fueling speculation the central bank is buying the currency to stem its losses. The holdings of US$96.7 billion are enough to finance 7.6 months of imports, according to a central bank statement accompanying the Aug. 7 data.

Malaysia continues to have sufficient reserves, Julia Goh, an analyst at Singapore's United Overseas Bank Ltd, wrote in a research note on Tuesday. As a rule of thumb, the optimal level for the holdings is that they should cover at least 5 months of import payments, she said. The central bank will continue to "smoothen out excessive volatility," Goh added.

Morgan Stanley and BNP Paribas SA are both forecasting the ringgit will end the year at 4 per dollar, the most bearish of bets among 33 analysts surveyed by Bloomberg since the start of July. One-month implied volaility for the currency, a measure of exchange-rate swings used to price options, is the highest in Asia at 13 per cent and above a two-year average of 8.2 per cent.

Malaysia's government bonds fell, with the five-year yield rising 11 basis points to 3.95 per cent, data compiled by Bloomberg show.

BLOOMBERG