Asia stocks buffeted by China worries, N.Korea nuclear test

6 January 2016
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Asian shares fell on Wednesday and most emerging currencies retreated as China allowed the yuan to weaken further, stoking fears about its slowing economy, while a North Korean nuclear test heightened geopolitical tensions.

This accelerated the fall in the offshore yuan which hit its lowest since October 2010, dragging down other emerging currencies like the Malaysian ringgit and Thai baht.

China has guided the yuan lower since a surprise devaluation of the currency last summer, rattling traders who fear it could eventually set off a round of competitive devaluations which will put further pressure on other emerging economies.

Some see the tactic as a desperate attempt by China to shore up growth, prompting concerns that the world’s second-biggest economy could be even weaker than imagined, though others say further yuan weakness was inevitable in the face of the strong US dollar.

A weaker yuan in theory improves the competitiveness of Chinese exports but the import cost increase it inflicts on the country’s manufacturers would be an unwelcome side effect.

The latest worrying news on China came in a private survey which showed services sector activity expanded at its slowest rate in 17 months in December.

Elsewhere in North Asia, South Korea’s KOSPI .KS11 and the won KRW= both fell on suspicions North Korea had conducted a nuclear test on Wednesday morning, which Pyongyang later confirmed.

“We’ve been seeing dollar-long positions form from the beginning of the year and this North Korea news is not good for the market,” a Bank of Korea official told Reuters.

“However, when we consider previous cases we don’t feel this will have a sustained influence on markets,” he said. It was North Korea’s fourth nuclear test.

The yuan’s weakness, the cooling economy and renewed stock market volatility have put China and its policymaking decisions clearly at the forefront of global risks at the start of 2016, along with the pace of expected US interest rate rises and weak commodity prices.

In commodities, crude oil prices struggled near 11-year lows and added to the risk-off mood, with the market more worried about the stronger dollar and swelling US inventories rather than growing tensions between Saudi Arabia and Iran.

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