Hong Kong Stock Exchange

Currency battle looms as yuan sinks; Hong Kong and China stocks reel as credit card curbs add capital control fears to market turmoil

PUBLISHED : Wednesday, 03 February, 2016, 9:15am
UPDATED : Wednesday, 03 February, 2016, 7:59pm

A currency battle seems poised to erupt after China’s offshore yuan slid on Wednesday as hedge funds shorted the currency ahead of Lunar New Year while Hong Kong shares finished sharply lower after Beijing’s curbs on mainlanders using credit card to buy insurance policies overseas sparked fears of more capital control measures to stem heavy capital outflows from the country.

The offshore yuan traded at 6.6507 per US dollar before clawing its way back to 6.6415 to the dollar at 6 pm on Wednesday, weaker by 0.23 per cent from Tuesday. The yuan has weakened by 0.74 per cent this week and has fallen by 1.12 per cent this year after dropping 5.67 per cent last year.

The spread between the onshore and offshore yuan stood at 645 basis points, the highest in a month but lower than the record 1,400 basis points hit on January 7.

Jasper Lo Cho-yan, director of Tung Shing Futures said the yuan started to see a lot of selling pressure late on Wednesday afternoon after the European markets opened.

“It appears the currency battle has begun. Some hedge funds who vowed to sell down the yuan and Hong Kong dollar started to take action this week. They are likely to increase their attacks next week in the overseas markets when the Hong Kong market will be closed for the Lunar New Year holiday,” Lo said.

Hedge funds such as those led by George Soros and Kyle Bass of Hayman Capital Management last month have both said they have been shorting Asian currencies. Soros, who successfully attacked a number of Asian currencies in 1997 and gained fame in beating the Bank of England, said it was unavoidable for the Chinese economy to have a hard landing while Bass expected the yuan would fall as much as 40 per cent over the next three years.

Chinese officials have hit back at Soros and insisted the economy was in good shape. Hong Kong Monetary Authority chief executive Norman Chan Tak-lam said on Monday they would defend the peg and claimed the local banking and stock markets are much stronger than 1997 at the height of the Asian financial crisis.

“Rumours about financial market predators taking short positions against the Hong Kong dollar are rampant,” Chan said. “Though the Hong Kong markets will be closed (for Lunar New Year), we will continue to keep a watchful eye on the external markets.”

The Hong Kong dollar dropped at one point to 7.8008 on Tuesday, down 0.27 per cent from Monday before rebounding to 7.7934 to the US dollar at 6 pm on Wednesday. It declined 0.55 per cent last month and once traded at 7.8294 on January 20, an eight-and-a-half-year low.

Stephen Innes, a senior trader at OANDA, said the weaker yuan and Hong Kong dollar was due to next week’s Lunar New Year holiday.

“All in all, the market is trading with a very cautious bias and is not looking to move too aggressively leading up to the holiday,” he said.

The weak yuan and Hong Kong dollar compounded the impact of a falling stock market. The Hang Seng Index at one point plunged over 600 points before closing 455.25 points or 2.34 per cent to 18,991.59. Hang Seng China Enterprises Index, also known as the H-share index that tracks mainland companies listed in Hong Kong, was down 200.52 points, or 2.49 per cent, to 7,858.31

Louis Tse Ming-kwong, director of VC Brokerage, said the new UnionPay policy capping overseas insurance spending at US$5,000 from Thursday as well as fresh turmoil in the oil market caused the day’s stocks to slump.

READ MORE: Hong Kong insurance stocks fall after UnionPay places curbs on policy purchases

‘The UnionPay cap led to panic selling as many see this as a precursor to more capital controls,” he said.

Jeffrey Chan Lap-tak, founding partner of Oriental Patron Financial Group, said China saw massive capital outflows last year which has led the authorities to tighten on UnionPay credit card overseas payments.

“The curb would mainly hit Hong Kong insurance stocks hard. However, what we should pay attention to is the signal behind such a move. Many believe the curb represents Beijing is very worried about the capital outflow that it would use different methods to control the outflow speed,” Chan said.

“It is likely for us to see Beijing to announce some more rule changes or policies that would prevent huge sum of overseas spending by travellers. This is natural as mainland China would like to see more people to spend in the country and to boost the domestic private consumption sector,” he said.

China has seen its economy slow and capital outflow while the yuan has fallen 5.67 per cent last year.

A Bank of America Merrill Lynch report last month predicted the PBOC might tighten capital controls, such as curbing the individual to buy US$50,000 a year, to prevent outflows and depreciation of the yuan.

“Market sentiment will potentially deteriorate further if the drop in official [foreign exchange] reserves accelerates to beyond US$100 billion per month, as seen from recent months,” the report said.

Insurance stocks took the most hammering in Hong Kong, falling nearly 3.46 per cent on average, followed by utility stocks that fell 2.28 per cent while banks were down on average by 1.88 per cent.

Several heavyweights fell to a one-year low including Standard Chartered which lost 2.75 per cent to close at HK$48.70, AIA down 4.88 per cent to close at HK$38.95, Industrial and Commercial Bank of China also down 0.76 per cent to HK$3.88.

The retreat in Hong Kong and regional markets came after major US indices all closed lower by about 2 per cent overnight as oil prices fell 6 per cent to below US$30 a barrel.

Elsewhere in the region, Japan’s Nikkei 225 Index fell 3.15 per cent, or 559.43 points, to 17,191.25 on Wednesday. The Sydney market was down 2.24 per cent and the South Korean market fell 0.84 per cent.

The Shanghai Composite Index, which is less affected by the fear of capital controls than the international market, only fell 0.38 per cent to close on Wednesday at 2,739.25. The Shenzhen Composite Index closed even higher by 0.47 per cent to 1,737.20.

Gold prices rose as investors took shelter in the precious metal, with spot gold rising to US$1,130.30 an ounce, its highest since November.