China’s economic crisis, lower yuan triggers fall in Asian stocks

Asian stocks fell on January 6 as Beijing continued to lower the yuan. A recent survey pointed to weakness in China’s services sector, while the Japanese yen drew support from risk aversion. The claim of a nuclear test in North Korea has further worsened the sentiment in Asia. South Korea’s KOSPI and the won both lost about 0.6%. MSCI’s broadest index of Asia-Pacific shares outside Japan lost 1 percent while Australian shares lost 1.3 percent and Japan’s Nikkei dropped 1.1%.

The People’s Bank of China set the yuan’s midpoint rate at its weakest level in four-and-a-half years on January 6. China has lowered the yuan steadily since sharply devaluing the currency last summer. This has rattled many traders who fear it could eventually set off a round of competitive devaluations.

This tactic of China is seen by many analysts as a desperate attempt by China to shore up its economy. This has raised concerns that the world’s second biggest economy could be even weaker than what was thought. On paper, a weaker yuan improves the competitiveness of Chinese exports but the import cost increase it inflicts on the country’s manufacturers would have a major impact.

China’s services sector expanded at its slowest rate in 17 months in December. A Caixin/Markit Purchasing Managers’ Index (PMI) survey showed that the world’s second-largest economy may be losing steam. Parallels are now being drawn by some analysts between China’s current economic trends and Japan’s economic trends which led to decades of stagnation in that country.

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