The Chinese yuan declined the most in a year as continued losses on US subprime concerns rocked currency markets in the overnight session. Particularly, the market punished currencies by trade partners currently used in a basket for the yuan fix. As a result, the underlying currency was lower against the US dollar, while somewhat stronger against the Euro and Pound on major weakness. In the New York session, the USDCNY traded at 7.6081. The currency may now very well be headed for the third weekly loss, the longest stretch of red since the revaluation took place more than two years ago.

China Fixed Asset Investment Advances 26.6 Percent
Spending on factories and equipment rose by an impressive 26.6 percent so far this year as businesses continued to meet growing demand domestically and abroad. Fixed asset investment in the world’s fastest growing economy surged ahead to $747 billion, close to the 26.7 percent rate last year according to the statistics bureau. In detail, for the first seven months of the year, new investment projects were in the view of 132,099, adding 17,168 to last year’s figure. Overall good for the economy, the surge in investment has, however, built up money supply inflation. As a result, speculation continues to grow over the possibility of further rate increases by the People’s Bank of China as policy makers attempt to rein in inflationary pressures supported by mounting growth. For the record the attempt would be the fourth time this year that policy makers will have tightened monetary policy aside from other monetary policy tools at the central bank’s disposal.

Speculation Increases On Likelihood of Individual Investment Abroad
In further attempts to ease strains by the runup in the Chinese currency, policy officials are mulling over the possibility of allowing individuals to invest capital abroad. Currently, individuals are allowed o invest abroad only through certain funds offered through a few banks and brokerage houses. However, the new policy, like others in recent months, would offer the country’s people to search outside of the mainland for higher returns. The conversion would inherently regulate the appreciating yuan as capital flows out investments abroad. “We are currently studying measures to allow individuals outbound direct investments and securities investments, and we will further relax capital account controls related to individuals,” noted Deng Xianhong, deputy director of the State Administration of Foreign Exchange. Incidentallly, the policy should be implemented with increasing ease as the government made conversions easier through policy adjustments made back in February.

Regional Equity Markets Pummeled
With subprime concerns still in the air, stock markets throughout Asia were beat down once again in the overnight session. Singapore’s stock markets posted the biggest two day decline in six years as the Straits Times Index dropped 121.77 points or 3.7 percent in the session. The overall market gauge finished lower at 3,152.16 as Singapore Exchange led decliners on the day. The operator of the city’s securities market was pressured throughout the session, following previous announcements that it had liquidated a huge block of investments in externally managed funds. The stock fell 7.8 percent on the day. Hong Kong’s market didn’t fare much better on the day, posting the steepest decline since the September 11th attacks. China Mobile shares slid HK$3.75 or 4.5 percent on the day even as the company posted profit that rose 26 percent in the first half of the year. The Hang Seng Index subsequently fell 810.35 to close down 3.8 percent at 20,565.37.

Richard Lee is a Currency Strategist at FXCM.