Asian markets fell to a three-month low on Thursday after Chinese shares tumbled more than 7% and triggered a market closure while Beijing accelerated a devaluation of the yuan, raising the spectre of a regional currency war.

The MSCI index of Asia-Pacific shares, which provides a rough overview of market performance across the region, dropped 1.4% to its lowest level since September.

Australia’s S&P/ASX 200 index lost 2% while South Korea’s Kospi index dropped 1%. Markets on the Pacific had already been jumpy after North Korea’s hydrogen bomb test on Wednesday.

The Thai SET fell 24.7 points, nearly 2%, at the opening of trade and stock indexes in Singapore and Taiwan lost more than 2%.

China’s new automatic “circuit breaker” mechanism tripped 30 minutes after trading opened on Thursday, the second time this week that the device, intended to bring stability to the markets following steep drops, has been deployed.

Beijing responded by speeding up the devaluation of the yuan to its lowest level in nearly five years, a move aimed to boost the economy by making Chinese exports cheaper.

The People’s Bank of China set the official midpoint rate on the yuan at 6.5646 per dollar, the weakest since March 2011.



But the move puts pressure on China’s Asian neighbours to follow suit and keep their exports competitively priced, analysts warn, a spiralling currency battle that led in part to the Asian financial crisis in 1997.

“When we look at 2016, the outlook for the yuan is a major concern not only for China but for all countries,” the chief Asia economist for IHS Global Insight, Rajiv Biswas, said. “Because obviously if the yuan goes down significantly against the US dollar, you are back in a world of currency wars.”

An index that tracks Asia’s 10 most-used currencies excluding the yen, the Asia Dollar Index, fell 0.3%.

The Australian dollar, often used during trades with China, fell by half a US cent to a two-month low and the New Zealand dollar plunged to a one-month low of $0.6615 to the US dollar.

“Many countries such as Vietnam and Malaysia watch the Chinese-US dollar exchange rate very closely because they are competing against Chinese products,” Biswas said. “So many Asian countries and other countries around the world would face a lot of pressure if the yuan goes down significantly against the US dollar from where it is now.”

On Monday, the first day China employed the “circuit breaker”, it was tripped by a 7% drop. On Tuesday, China intervened, spending almost $20bn (£13.6bn) offering cheap borrowing facilities. But the Thursday drop set off the circuit breaker again and Beijing intervened in the currency.

The CEO of Singapore’s DBS Bank Ltd, a banking and financial services company, told the Business Times that 2016 would be a year of “currency wars”.

Piyush Gupta said the Singapore economy would also go through “perhaps the trickiest and most sensitive time in its economic transformation that we’ll see for a long time”.

“I think if you had to put a label on 2016, I would say this is going to be a year of currency wars. I think everybody, by the end of the year, will all be trying to weaken their currency,” he said, adding that the yuan depreciation is “perhaps the single biggest risk that you should be focused on this year”.

The Japanese yen usually benefits during global turmoil and increased in value.

• This article was amended on 8 January 2016 to correct the amount by which the Australian dollar fell.