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China guides yuan higher, stocks fall anyway

Hong Kong Interbank Offered Rates (HIBOR) all hit record highs on Monday, led by the overnight rate which spiked to over 13 per cent from 4 per cent Friday, as investors bailed out of offshore yuan for dollars.

[SHANGHAI] China guided its yuan currency sharply stronger for a second straight session on Monday in a move that might calm concerns about a competitive devaluation, but only added to market confusion as to Beijing's ultimate policy intent.

Equity investors seemed less than reassured, with the Shanghai Composite Index and the CSI300 index both falling around 2 per cent in erratic early trade, after a 10 per cent plunge last week which triggered a global sell-off of riskier assets.

The People's Bank of China set the mid-point for the yuan at 6.5626 per dollar, confounding analysts who had looked for something around 6.5860.

The move was an apparent reversal of the recent weakening trend which included the biggest one-day drop in five months.

China's foreign exchange regulator on Saturday said it would ramp up risk control efforts and push ahead with regulatory reforms, but was frustratingly short on specifics.

The perceived missteps by the authorities have stoked concerns Beijing might lose its grip on economic policy, too, even as China looks set to post its slowest growth in 25 years. Both the Dow and S&P 500 SPX had their worst five-day starts in history last week. "Different signals about FX policy have wrong footed market participants and we are wary in believing that an immediate calmness will soon emerge," wrote Paul Mackel, head of emerging markets FX research at HSBC in a note. "In this context, we expect yuan volatility to remain high while depreciation pressures are likely to remain strong." Chinese markets have had a tortuous start to the year, buffeted by the falling yuan, two days of stock exchange suspensions, weak factory and service sector activity surveys and worries about looming share sales by major stakeholders once a ban on such sales expires.

All of which heightened tensions ahead of China trade data on Wednesday where further declines are expected in exports and imports, underlining the parlous state of world trade flows.

Figures out over the weekend showed Chinese consumer inflation stuck at a subdued 1.6 per cent in December, while producer prices were down a steep 5.9 per cent on the year - a deflationary pulse that is being felt across the globe.