(Bloomberg) — Emerging-marketstocks sank to the lowest since 2009 as China’s move to further weaken the yuan’s reference rate sparked a selloff in mainland stocks that spread throughout developing nations.
The CSI 300 Index of companies listed in Shanghai and Shenzhen plunged more than 7 percent before exchanges were halted by circuit breakers in the first half-hour of trading. South Africa’s rand weakened to a record low against the dollar. The Ibovespa tumbled for a second day as a plunge in Brazilian industrial production added to concern that demand for the nation’s exports will weaken further as China’s economy slows.
Developing-nation equities are on course for the biggest weekly drop since 2011 as China weakened the yuan’s reference rate for an eighth day, fueling concern that the economic slowdown is deeper than official data suggest and dimming prospects for trade with the world’s second-largest economy. The World Bank on Wednesday cut its global growth forecast for 2016 on concern that China’s slowing economy will prolong a commodity slump and recessions in Brazil and Russia. Global markets are facing a crisis and investors need to be very cautious, billionaire George Soros said.
“Overall there is a risk-off cocktail,” said Guillaume Tresca, a strategist at Credit Agricole SA in Paris. “The continued fall in the Chinese stock market is the main reason. The declines in oil prices are disruptive. We expect risk-off to prevail in the short term.”
China is struggling to find a new growth model and its currency devaluation is transferring problems to the rest of the world, Soros said in Colombo, Sri Lanka. A return to positive interest rates is a challenge for the developing world, he said, adding that the current environment has similarities to 2008.
The MSCI Emerging Markets Index fell 2.8 percent to 738.86 on Thursday. Its 14-day relative-strength index fell to 22.4, below the level of 30 that some analysts see as a signal a market is set to rebound. The developing stock measure has tumbled 7 percent this week, compared with a 5.2 percent drop in the MSCI World Index.
China’s stock exchanges closed at 9:59 a.m. local time, just 29 minutes after markets opened, as the CSI 300 gauge of companies listed in Shanghai and Shenzhen extended this year’s decline to 12 percent. Trading was halted for about half that time after a 5 percent drop triggered an earlier suspension. China’s markets are normally open from 9:30 a.m. to 3 p.m., with a 90-minute break.
“So far this week, almost all the market action has been driven by what’s happening in China,” said Mixo Das, a Singapore-based strategist at Nomura Holdings Inc. “We will continue to see volatility until the yuan stabilizes. Near-term caution is warranted.”
China’s securities regulator suspended the stock circuit- breaker after it triggered Thursday for the second time this week. The Hang Seng China Enterprises gauge of mainland shares listed in Hong Kong tumbled 4.2 percent to the lowest close since October 2011. The biggest exchange-traded fund tracking mainland Chinese stocks slumped 4 percent in New York.
All of 10 industry groups in the MSCI developing-nations gauge fell as a measure of energy shares tumbled 3.1 percent. Oil dropped to the lowest in 12 years as the turmoil in China’s markets pushes crude closer to $30 a barrel.
China weakened the yuan’s reference rate by 0.51 percent to 6.5646 on Thursday, the lowest since March 2011, amid signs that policy makers are becoming more tolerant of a weaker currency as they struggle to revive economic growth. That’s raising the risk that developing nations will have to weaken their currencies to stay competitive.
The currency in South Africa, which counts China as its biggest trading partner, dropped 1.3 percent. Mexico’s peso slid 1.7 percent. South Korea’s won and the Taiwanese dollar each slumped 0.3 percent. A gauge tracking 20 emerging-market exchange rates against the greenback was little changed after falling to a record low on Wednesday.
“For broad emerging markets, negative pressure on commodity markets is the bigger risk,” said Kenneth Akintewe, a Singapore- based senior investment manager at Aberdeen Asset Management Plc. “For Asian currencies, yuan weakness will have varying degrees of a correlated impact.”
The offshore yuan swung from a 0.4 percent gain and a 1 percent decline, spurring intervention speculation and creating confusion about what the central bank is trying to achieve. The spot rate in Shanghai sank to a five-year low.
The spread for emerging-market debt over Treasuries was unchanged at 424 basis points. South Korea’s sovereign bonds rose, pushing the 10-year yield to a record low, as a weak currency and North Korea’s nuclear test spurred demand for safer assets. The yield on government bonds maturing December 2025 declined two basis points to 2.02 percent. It earlier reached 2 percent, the lowest on record for a 10-year benchmark note.
–With assistance from Tian Chen, Zhang Shidong, Anusha Ondaatjie, Nupur Acharya and Krystof Chamonikolas.