China central bank intervening to support yuan via state-owned banks: traders

China allowed the biggest fall in the yuan in five months on Thursday, pressuring regional currencies and sending global stock markets tumbling as investors feared it would trigger competitive devaluations.

Some bears in the currency markets believe that China could soon be suffering from a genuine exchange rate crisis, in which its enormous foreign exchange reserves could be quickly drained.

The People’s Bank of China, the central bank, reduced the guidance rate by 0.5% on Thursday taking the exchange rate to 6.5646 per dollar, which is the weakest point since February 2011.

Almost two-thirds of the drop came between August and December, hinting at the scope of the central bank’s attempts to stabilise the yuan after its surprise devaluation in August panicked markets.

However, other markets continued to suffer.

“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).

China gained temporary respite after spending nearly $20bn (£13.6bn) offering cheap borrowing facilities, helping the blue-chip CSI 300 index to end the day with a modest decline of 0.4%.

Additionally, a weaker yuan is feared to drive the global economy closer to a recession as the purchasing power of the world’s second largest economy deteriorates every time the currency is devalued.

China burned through $108 billion in December, according to China’s central bank, as the country tried to stabilize the yuan as it depreciated against the dollar.

A vendor holds Chinese Yuan notes at a market in Beijing, August 12, 2015.

The South Korean unit is seen weakening further, not because of the tensions, but because of a slowing China’s economy and uncertainty over the yuan, traders said.

“We’ve had a stabilization in China overnight, but the question remains as to whether China’s economy is headed for a hard or soft landing”, said Richard McGuire, senior fixed income strategist at Rabobank.

Equities markets were also notable and immediate casualties, especially domestic Chinese shares.

The benchmark CSI300 also rose 2 per cent on Friday to closed at 3,361.56, bringing its decline fro the week to 10 per cent. Shenzhen’s main share index ended Friday with a 14.3 per cent decline for the week, while ChiNext lost 17.1 per cent, its worst performance since its launch in 2010.

Beijing also performed a dramatic U-turn on Thursday by deactivating a stock market circuit-breaker, itself was blamed for aggravating this week’s market falls.

The tumult in markets and China this week has so far led investors to wager on even less tightening this year, one factor undermining the dollar. Japan’s Nikkei was 0.4 per cent higher, while Hong Kong’s Hang Seng rose 0.9 per cent. Australia’s S&P/ASX 200 was down 0.6 per cent in afternoon trading in Sydney.

The new rules didn’t go down well with investors.

They were still hopeful, however, that the authorities were not yet outmatched.

The greenback was sitting at one-month highs against the euro, with the single currency buying US$1.0749 (S$1.54), while the British pound was near one-year lows at US$1.4666.