Share prices sank to the lowest level in more than three years yesterday as fears about a devaluation of the yuan hammered an already fragile market.
The Hang Seng Index tumbled almost five per cent to 7979.37 points as interbank rates rose, increasing the cost of corporate borrowing. It was the blue-chip index's lowest close since March 10, 1995.
Share markets and currencies fell across the region as the fall of the yen triggered concerns about the stability of China's exchange rate. The Japanese currency is at a seven-year low.
Nikko Research Centre analyst Ken Chan said: 'The worry in the market is the depreciation of the yuan . . . If the yen depreciates rapidly - say to 150 [to the US dollar] - that will put the yuan under pressure.' Brokers said concerns about the Chinese currency had grown after People's Bank of China Governor Dai Xianglong said on Tuesday the yen's fall was harming the mainland's economy.
A weaker yen hurts the chances of an Asian recovery and raises pressure on other currencies, including the Hong Kong dollar.
Credit Suisse First Boston director and head of research Sung June Hwang said: 'As long as the peg stays, there will be uncertainty - the yen's slide has reignited concerns. We think that the peg will stay, which means the economy will bear the brunt.' The share market has been hit in recent weeks by confirmation the economy shrank in the first quarter.
