Yuan Tumbles to Two Year Low, Chinese Equities Plunge 30%

Shares on China’s Shanghai Composite  Index sank 3 percent Thursday on  concerns margin calls may drive prices lower  and that  the government might have to intervene to maintain calm in the  financial markets of the world’s second largest economy.

Adding to China’s equity  worries the yuan (USD/CNY) reached its weakest level against the dollar in almost two years at 9.9424, adding to its 11 percent slide since March. The  People’s Bank of China (PBOC) lowered its daily fixing rate, around  which the yuan is allowed to trade by 0.25 percent.    Aside from a brief two week period in late December 2016  and  January 2017 this is the weakest the yuan has been against the dollar in over a decade, since August 2008.    

Yesterday the U.S.  declined to name China as a ‘currency manipulator’   but the escalating trade dispute with  the United States, slowing economic growth  and rising American interest rates have taken  a heavy toll on the yuan. In addition  the Trump administration plans to withdraw from a postal treaty that provides favorable mailing and shipping rates to Chinese companies, heaping retail shipping problems on top of industrial ones.   The Treasury Department FX Report Executive Summary  noted that ‘it is clear that China is not resisting  depreciation through intervention as it had in the recent past’, indicating special focus on the yuan.

The Shanghai Index has fallen 30 percent  since its January high, the globe’s deepest equity slump, and touched a nearly four year low on Thursday, closing at 2,486. About 11 percent  of the Shanghai Index capitalization, $603  billion  (4.2  trillion yuan) is listed as collateral for loans, a dangerous practice in a falling market that could force increasing liquidation as share prices drop.  

Chinese equites have borne the brunt of the trade argument  with the United States and the spread  between China’s markets  and the rest of the world underlines the threat the  mainland economy faces from the  Trump administration.   Beijing has thus far not been provoked into the type of major rescue effort it  launched  in 2015.