Shares on China's Shanghai Composite Index sank 3 percent Thursday on concerns margin calls may drive prices lower and that the government might have to intervene to maintain calm in the financial markets of the world's second largest economy.

Adding to China's equity worries the yuan (USD/CNY) reached its weakest level against the dollar in almost two years at 9.9424, adding to its 11 percent slide since March. The People's Bank of China (PBOC) lowered its daily fixing rate, around which the yuan is allowed to trade by 0.25 percent.  Aside from a brief two week period in late December 2016 and January 2017 this is the weakest the yuan has been against the dollar in over a decade, since August 2008.  

Yesterday the U.S. declined to name China as a 'currency manipulator'  but the escalating trade dispute with the United States, slowing economic growth and rising American interest rates have taken a heavy toll on the yuan. In addition the Trump administration plans to withdraw from a postal treaty that provides favorable mailing and shipping rates to Chinese companies, heaping retail shipping problems on top of industrial ones.  The Treasury Department FX Report Executive Summary noted that 'it is clear that China is not resisting depreciation through intervention as it had in the recent past’, indicating special focus on the yuan.

The Shanghai Index has fallen 30 percent since its January high, the globe's deepest equity slump, and touched a nearly four year low on Thursday, closing at 2,486. About 11 percent of the Shanghai Index capitalization, $603 billion (4.2 trillion yuan) is listed as collateral for loans, a dangerous practice in a falling market that could force increasing liquidation as share prices drop. 

Chinese equites have borne the brunt of the trade argument with the United States and the spread between China's markets and the rest of the world underlines the threat the mainland economy faces from the Trump administration.  Beijing has thus far not been provoked into the type of major rescue effort it launched in 2015.

FXStreet.com