“Another 1.6 per cent effective devaluation in the CNY (on-shore yuan) today appears to confirm both the paradigm shift towards a more market-based forex regime and, implicitly, China’s shift from conscientious objector in the global currency wars to a full-bloodied combatant.

The PBoC’s latest ‘Q&A’ press release seemingly confirms the regime shift with market pricing now determining the daily ‘fix’ and, tellingly, warns that this may ‘lead to potentially significant fluctuation of the central parity in the short run.

China’s dirty peg vs. the US dollar has for many years operated as a regional FX anchor, damping volatility and limiting the headroom for other regional currencies to depreciate against the US dollar.

The events of the last two days however mean that the regional FX anchor is shifting for the first time in years. Unsurprisingly, regional FX volatility has spiked with most currencies being dragged down vs. the US dollar with the CNY to varying degrees. 

Apart from the India Rupee, the Taiwan Dollar has suffered the most followed by the Korean won, the Australian dollar, the Malaysia Ringgit, and the New Zealand Dollar have slid between 1-3/4 per cent and 3 per cent vs. the US dollar. The relative outperformers have so far been the India Rupee, the Thai Baht, and the Philippine Peso.”

3:07pm: The Hang Seng Index again slips below 24,000, trading to 23,915.27, down 2.38 per cent or 582.94 points. The H-shares index also retreats past a milestone, dropping to 10,987.50, down 2.46 per cent or 277.14 points.

3:05pm: Qu Hongbing, chief China economist with the HSBC commenting on the gloomy economic data on his blog:

“The basket of disappointing economic data will fuel market expectations that the yuan will further depreciate, indicating a loosening monetary policy is in need to spur a slowing economy."

2:40pm: China’s fixed-asset investment, a crucial gauge on the economy’s growth momentum, lifted 11.2 per cent for the first seven months from the same period last year, falling short of economist forecasts of an 11.5 per cent rise, data released Wednesday by the National Statistics Bureau showed.   

The country’s factory output for July grew six per cent year-on-year, missing market consensus of a 6.6 per cent increase, while retail sales for July amounted to about 2.43 trillion yuan, up 10.5 per cent from June, versus market estimates of a 10.6 per cent rise, official data showed. 

2:27pm: Fan Gang, member of the Monetary Committee of the People’s Bank of China rejects suggestions that the yuan has depreciated, saying the current yuan rate largely reflects a supply-demand balance, the official Shanghai Securities News reports.

“The renminbi has not depreciated against a basket of major currencies other than the US dollar, therefore it is now is fairly valued,” the paper quoted Fan as saying.  

2:06pm: The Hang Seng Index stands at 24,019.07, down 1.96 per cent or 479.14 points, having briefly dipped below 24,000. The H-shares index trades at 11,065.86, down 1.76 per cent or 198.78 points. 

2:06pm: The Shanghai Composite Index improves to 3,931.30, up 3.55 points or 0.09 per cent. The CSI300 moves to 4,061.94, down 4.73 points or 0.12 per cent. 

2:06pm: The Shenzhen Composite Index is steady at 2,280.71, down 3.56 points or 0.16 per cent. The ChiNext Price Index hovers at 2673.71, down 25.20 points or 0.93 per cent.

2:02pm: Hong Kong Exchanges and Clearing has slid 3.8 per cent to HK$207.80 today, having announced interim results at lunch which fell shy of expectations. However, many other large caps are showing similar losses as trading volume picks up.  

Tencent leads turnover with more than HK$3 billion, but slides 3.98 per cent to HK$135.20 with its interim results due after closing today. 

Insurers Ping An, China Life and AIA are all more than 2 per cent down, as is Bank of China. CCB and ICBC are more than 1.5 per cent down, while Bank of China Hong Kong is down 5.71 per cent to HK$29.70. 

China airlines have clawed back some ground, with the big three now down between 3 and 7 per cent, but major China property developers continue to languish more than 6 per cent off.

1:04pm: Hong Kong’s Hang Seng Index begins the afternoon at 24,068.29, down 1.75 per cent or 429.92 points today. The China Enterprises Index of H-shares opens at 11,043.76, down 1.96 per cent or 220.88 points. 

1:04pm: The Shanghai Composite Index stands at 3,910.30, down 17.61 points or 0.45 per cent. The CSI300 large cap index is steady at 4,052.19, down 14.48 points or 0.36 per cent. 

1:04pm: The Shenzhen Composite Index is trading at 2,276.74, down 7.53 points or 0.33 per cent. The ChiNext Price Index has dropped today to 2673.54, down 25.37 points or 0.94 per cent.

12:21pm: The Hang Seng Index (orange) and H-shares index (purple) from opening to midsession today – click to enlarge.

12:20pm: Of Hong Kong’s top 20 stocks by turnover, only exporter Li & Fung and aviation R&D firm Avichina finished the morning with their share prices up. 

Li & Fung was the clear top performer on the Hang Seng Index, lifting 4.71 per cent to HK$6 as investors pegged it as a probable beneficiary of the yuan devaluation.

12:17pm: China Everbright International, one of the mainland’s largest builders and operators of waste-to-energy and water treatment plants, posted a 25 per cent year-on-year rise in net profit to HK$1.0 billion, up from HK$801.87 million in the year earlier period. Turnover rose 28 per cent to HK$3.77 billion.

12:15pm: Market operator Hong Kong Exchanges and Clearing says first half net profit up 73 per cent to HK4.095 billion, slightly below market expectations. Revenue up by 48 per cent HK$6.85 billion.

Average daily turnover double in the first half of 2015 to HK$125.3 billion, boosting fee and clearing income.

Interim dividend at HK$3.08 per shares, up 68 per cent from a year earlier. 

12:06pm: The Hang Seng Index closed its morning trading at 24,068.29, down 1.75 per cent or 429.92 points. The China Enterprises Index (H-share index) slides 1.96 per cent, or 220.88 points, to 11,043.76.

11:54am: China indices at midsession today: the Shanghai Composite (orange), Shenzhen Composite (green), CSI300 (purple) and ChiNext (blue). Click to enlarge. 

11:41am: The Shenzhen Composite Index goes down 0.36 per cent, or 8.17 points to 2,276.11 at the close of morning trade. The NASDAQ-style ChiNext Price Index slips 0.93 per cent, or 25.03 points at 2,673.89.

11:40am: The Shanghai Composite Index closed its morning session at 3,910.30 points, down 0.448 per cent, or 17.61 points. The CSI300 index of Shanghai-Shenzhen large cap stocks loses 0.356 per cent or 14.48 points to 4,052.19. 

11:27am: Onshore spot yuan is trading at 6.4271 against the US dollar, weaker by 1.64 per cent, or 1039 basis points from Tuesday's close. The offshore yuan stands at 6.5003, weaker by 1.76 per cent, or 1125 basis points from Tuesday finish.

11:15am: Hong Kong dollar is trading Wednesday at 7.7575 against the US dollar, near upper end of the currency peg. Euro/dlr stronger by 0.14 per cent at 1.1058. Dlr/yen at 125.23, stronger by 0.08 per cent. Pound/dlr weaker by 0.08 per cent to 1.5560. Australian dollar to US dollar weaker by 0.66 per cent to 0.7258. 

11:06am: Yuan and other major currencies all fell against the US dollar over the past five day period until Wednesday morning

In the chart below USD/CNY (yellow), USD/Yen (purple), USD/Korean won (green), and USD/Euro (blue). Click chart to enlarge.

11:00am: International Monetary Fund on Beijing’s new yuan fixing rule, a statement published Wednesday on the IMF website shows. 

“The new mechanism for determining the central parity of the Renminbi announced by the PBC appears a welcome step as it should allow market forces to have a greater role in determining the exchange rate. The exact impact will depend on how the new mechanism is implemented in practice. 

A more market-determined exchange rate would facilitate SDR operations in case the Renminbi were included in the currency basket going forward.”

10:50am: Hong Kong trading sentiment is largely negative in the first hour as investors get a grip on the winners and losers from the RMB revaluation.

Airline H-shares continue to plummet as Chinese travelers lose spending power on top of having their stock market gains wiped out in the crash. China Southern and China Eastern each drop more than 9 per cent and Air China is down 5 per cent. 

The property sector is likewise struggling. Red chips China Resources Land and China Overseas Land & Investment lead the Hang Seng losers, both dropping 5 per cent. Cheung Kong and Henderson have declined between 1 and 2 per cent. 

Precious metals have calmed since yesterday’s surge. Hong Kong investors are moving into safe territory provided by local power stocks CLP Holdings, HK & China Gas and Power Assets, each posting modest gains.

10:40am: The Shenzhen Composite Index falls 0.66 per cent, or 15.17 points to 2,269.11. The NASDAQ-style ChiNext Price Index slides 1.22 per cent, or 32.99 points at 2,665.93.

10:40am: The Shanghai Composite Index stands at 3,906.39 points, down 0.548 per cent, or 21.52 points. The CSI300 index of Shanghai-Shenzhen large cap stocks sheds 0.405 per cent or 16.48 points to 4,050.19. 

10:40am: The Hang Seng Index stands at 24,142.76, down 1.45 per cent or 355.45 points. The China Enterprises Index (H-share index) loses1.51 per cent, or 169.95 points, to 11,094.69.

10:11am: Both onshore and offshore yuan fell on Wednesday morning after the People's Bank of China set the mid-price 1.6 per cent lower as the devaluation of the currency entered its second day. The yuan was,devalued on Monday by almost 2 per cent.

Onshore yuan traded at 6.4110 on Wednesday, down 1.39 per cent from the previous close, and having been down 1.83 per cent on Monday.

Offshore yuan traded at 6.4946, down 1.67 per cent from Tuesday, after being down 2.80 per cent from Monday.

The People’s Bank of China set the mid-price of onshore yuan trading at 6.3306, weaker by 74 basis points against the US dollar from the Tuesday onshore spot yuan closing price, weaker by 1008 basis points to the US dollar from Tuesday's mid-price fix.

PBoC said on Wednesday the devaluation was due to new fixing rule that would reference the previous day’s closing price, the supply and demand in the foreign exchange markets as well as exchange rate movements of the other major global currencies. 

10:09am: People’s Bank of China says the near 1.6 per cent further devaluation of the yuan in its mid price Wednesday is due to the new pricing rule that has given market forces a bigger say.

It takes time for the market makers to digest the new rule which will give rise to sharper yuan rate fluctuations in the near time, a spokesman with the central banks says.  

9:59am: Chinese securities regulators are investigating cases where listed companies cooperated with private equity firms to carry out insider trading and market manipulation, official Shanghai Securities News reports.

9:47am: Tim Cooper, global economist, at BMI Research, a division of Fitch Group penned a list of concerns about the yuan’s devaluation. Here are some of them: 

1. The devaluation has worsened the outlook for global trade and will have a clearly negative effect on China's competitors and those with high exposure to the Chinese market.

While China's devaluation will do little to increase export competitiveness in our view, it sends a clear signal that conditions are not ripe for a full-on Chinese rebalancing act. And even if the CNY move is minor, the last thing that global trade needed was for the world's biggest exporter to join the beggar-thy-neighbour trend. 

2. It has increased the risks of another round of global deflation. 

China was going to be exporting more deflation anyway given weak economic conditions domestically, and commodities ' collapse pointed in the direction of further disinflation, but the CNY move puts the icing on the cake. Certainly, the high prevalence of Chinese goods in import baskets will put downside pressure on inflation in developed markets that are already experiencing very low price pressures and/or deflation. 

3. It will propel the dollar even further onto the front foot and could spur further rounds of competitive FX devaluations. 

4. It will have a negative impact on Chinese borrowers who have external debt/loans, and potentially have a knock-on effect for other EM FX debtors. 

External exposure is around US$ 1 trillion according to some reports. This means that roughly every 1 per cent move in CNY is worth about USD10 billion to China's debtors on a gross basis .

To be fair, the overall foreign debt figure is very small in comparison to GDP (about 11 per cent of GDP) and foreign reserves (about 2 5 per cent) so the risks of a classic EM foreign currency debt crisis are probably still low. However, it could potentially be impactful given that the vast majority of that debt is thought to be unhedged.

Click on chart below to enlarge.

 

9:45am: Diana Choyleva, chief economist and head of research at Lombard Street Research: 

“In a world lacking genuine consumer demand, competitive devaluation by the major global savers will ultimately help none of them. But while Japan has no need for a weaker yen and the euro is not expensive, China is the only major saver with an overvalued currency and would benefit from a weaker yuan as it rebalances towards consumer spending. The key to achieving this is to allow the market to set the exchange rate and liberalise the financial system. 

We remain cautiously optimistic that China is on the right policy path. But the litmus test will be Beijing’s reaction to a weaker labour market. But for China to have a chance, the US and Japan need to help. America must accept a weaker yuan if driven by markets, while Japan has to wean itself from its QE obsession. Both are a tall order, so we remain concerned that another crisis is on the horizon.”

Click on chart below to enlarge.

9:43am: Phoenix New Media, the US-listed subsidiary of Phoenix Satellite Television Holdings, said net income fell to HK22.5 million in the second quarter of the year from HK$84.5 million during the same period last year.

9:40am: The Shenzhen Composite Index opens at 2,271.98, down 0.54 per cent, or 12.29 points. The NASDAQ-style ChiNext Price Index slips 0.88 per cent, or 23.70 points to open at 2675.21.

9:40am: The Shanghai Composite Index opens the morning at 3,899.36 points, down 0.727 per cent, or 28.55 points on Tuesday’s close. The CSI300 index of Shanghai-Shenzhen large cap stocks opens at 4,042.86, down 0.585 per cent or 23.81 points. 

9:40am: The Hang Seng Index opens at 24,111.90, down 1.58 per cent or 386.31 points. The China Enterprises Index (H-share index) opens at 10,973.73, down by 2.58 per cent or 290.91 points.

9:19am: The People’s Bank of China sets the mid-price of onshore yuan trading at 6.3306, weaker by 74 basis points against the US dollar from the closing price of the onshore spot yuan on Tuesday.   

9:06am: Shanghai Composite Index edges down 0.002 per cent, or 0.07 points to 3,927.84 at the preopening of morning trade. CSI300 Index loses 0.003 per cent, or 0.12 points to 4,066.55. 

9:06am: Hang Seng August futures contracts are trading at 24,400 points, up 10 points or 0.04 per cent. 

9:05am: Two Shanghai listed A-share companies applied to resume trading on Wednesday while five companies will suspend trading in their stock. The number of suspended companies in Shanghai is 93, representing 8.63 per cent of the total.

In Shenzhen, six listed companies say they will resume trading on Wednesday, while five firms will suspend trading in their shares. Some 293 firms in Shenzhen are in voluntary suspension, accounting for about 17.32 per cent of total listed companies. 

9:02am: HSBC equity strategist Roger Xie:

“When the yuan depreciated in 2011 and 2014, companies with USD-denominated bonds or debts were hit hard. Airlines and property companies suffered; retail and insurance also underperformed their benchmarks. Energy, utilities and telecoms outperformed.

The impact of a 2 per cent move in the yuan on stocks is likely to be small overall but could be significant for indebted companies with weak profits.

MSCI China as a whole has limited exposure to exports, so the benefits of a depreciated yuan could be limited.

Economic risks include: (1) the effect on global commodity demand; (2) the impact on the travel plans of Chinese citizens and, in turn, the offshore retailers they plan to visit; (3) the implications for international brands selling into China.”

Click on chart below to enlarge.

8:38am: Heng Koon-how, FX strategist with Credit Suisse private banking: 

“While we were surprised by this one-off depreciation of the on-shore yuan, we believe that further outright depreciation is not on the cards. At this stage, we maintain our neutral overall view on USD/CNY (onshore yuan) and align our 3M and 12M point forecasts to the prevailing spot rate of 6.33,  from the previous point forecast of 6.20. 

As for the offshore yuan, it is noted that because of the unexpected action from the People’s Bank of China, it has weakened at a more intense rate. Today’s more volatile price action in CNH (offshore yuan) is not unexpected, as its offshore nature allows full two-way market trading and bias is clearly negative for today.

Nonetheless, as per previous occasions of market volatility, once the dust settles, we would expect the offshore yuan to converge towards the onshore yuan spot rate again.”

Click on chart below to enlarge.

8:28am: WH Group (orange), the world’s largest pork company, is going to announce its interim result today.

The company closed at HK$4.95 on Tuesday, up 1.02 per cent from Monday's close. Its share price has largely outperformed the Hang Seng Index (purple) over the past three months. Click on chart below to enlarge.

8:27am: China Everbright International (orange), a developer of environmental protection projects, will announce its interim result today.

The company closed at HK$12.12 on Tuesday, down 1.942 per cent from the previous close. Its share price underperformed Hang Seng Index (purple) from May to August. Click on chart below to enlarge.

 

8:25am: SJM Holdings (orange), one of the major casino operators in Macau, is going to announce its interim result today.

Its share price has generally underperformed Hang Seng Index (purple) over the past three months. The company closed at HK$9.01 on Tuesday, down 2.278 per cent from Monday's close. Click on chart below to enlarge.

 

8:20am: Tencent Holdings (orange), one of the world’s largest Internet companies, will announce its interim result today.

The company closed at HK$140.8 on Tuesday, down 1.401 per cent from the previous close. Its share price has generally outperformed the Hang Seng Index (purple) over the past three months. Click on chart below to enlarge.

8:15am: Shanghai-based Yingde Gases Group, China’s largest producer of industrial gases such as pure oxygen, nitrogen and argon, reported Tuesday a 2.3 per cent year-on-year rise in net profit to 416.23 million yuan for the year’s first half.

Sales volume grew 2.6 per cent, but unit price of gases fell amid the downturn of the metals processing industries. Its share price has fallen almost 30 per cent in the past three months amid weak mainland industrial output growth, substantially underperforming the Hang Seng Index.

Click on chart below to enlarge.  

8:10am: Hong Kong Stock Exchanges and Clearing (orange), one of the world’s largest exchange owners, is going to announce its interim result today.

Its share price outperformed the Hang Seng Index (purple) from May to June, but it has significantly underperformed the index since July mainly after a rout in equity markets here impacted turnover. The company closed at HK$216 on Tuesday, down 1.008 per cent from Monday's close.

For a chart on its recent performance, click below to enlarge. 

7:51am: Onshore spot yuan trading closed Tuesday at 6.3232 against the US dollar versus the mid-price of 6.2298 set by People’s Bank of China earlier in the morning. China had devalued the yuan by almost 2 per cent against the dollar yesterday.