The Chinese authorities have resorted to “nuclear strength” weapons to deter an attack on the yuan by short sellers and convince sceptical investors that they are in control of the country’s spluttering financial system.
China’s central bank fixed the currency firmer again on Tuesday but traders were not persuaded and the currency slipped in early trade despite what dealers called aggressive intervention to support the currency.
The gap between the mainland yuan and its offshore counterpart had grown in recent days but suspected intervention by China’s state-owned banks brought them almost into line on Tuesday.
The action sent the rate at which banks charge each other to borrow yuan in Hong Kong to a record high of 67% on Tuesday.
“The market suspects that the People’s Bank of China is possibly using major state banks to directly drain yuan liquidity in offshore markets,” said a dealer at an European bank in Shanghai.
The dealer described the strength of the central bank’s actions as being of “nuclear-weapon” level strength. “Its actions are comparable to steps taken by other central banks when they previously fought against international speculators, such as George Soros,” he said.
Equity markets earlier made early modest gains before giving these up in later morning trade with the Shanghai Composite Index falling 1.2% and the CSI300 index shedding 0.4% before again recovering into positive by midday.
Other markets in the region continued to struggle with the Nikkei off 2% and the ASX/S&P 200 in Australia see-sawing in and out of the red.
Oil prices, which have lost 20% already this year amid uncertainty about the Chinese economy, continued to slide on Tuesday.
Brent crude fell 43c to $31.12 a barrel having earlier touched $31.08, their lowest since April 2004. US crude was trading at $30.98 per barrel, also down 43c.
Signalling a desire for stabilisation, the People’s Bank of China set the mid-point for the yuan at 6.5628, barely changed from the previous strong fix and higher than its late levels on Monday.
Perceived mis-steps by China’s authorities have stoked concerns in global markets that Beijing might be losing its grip on economic policy, just as the country looks set to post its slowest growth in 25 years.
Amid suspicions by some in the market that China wants the yuan to devalue in order to boost its ailing exporters, sources suggested there were moves afoot for China’s cabinet to take a bigger role in overseeing financial markets.
The state council has set up a working group to prepare for upgrading the cabinet’s financial department to bureau level, said a source close to the country’s leadership.
Officials were doing their best to talk up the currency which was trading up slightly at 6.5757 to the dollar at 4am GMT on Tuesday.
The central bank’s chief economist Ma Jun said on Monday that the bank planned to keep the yuan basically stable against a basket of currencies, and fluctuations against the US dollar would increase.
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Courtesy of Guardian News & Media Ltd