China stuns financial markets by devaluing yuan.

Stocks, currencies and commodities fall sharply across region as investors fear a stalling China economy and possible currency war despite Beijing’s assurances China stunned the world’s financial markets on Wednesday by devaluing the yuan for the second consecutive day, triggering fears the world’s second largest economy is in worse shape than investors believed.

The move sent fresh shockwaves through global markets, pushing shares sharply lower and sending commodity prices further into reverse as traders feared the move could ignite a currency war that would destabilise the world economy.

There were widespread losses in Asia, and in Europe stock markets suffered falls of about 1%, with the FTSE 100 tumbling almost 2% at one stage.

The Chinese currency hit a four-year low on Wednesday after the People’s Bank of China set the yuan’s daily midpoint even weaker than in Tuesday’s devaluation.

With the bank having said that Tuesday’s move was a “one-off depreciation”, the rapid drop in the value of China’s currency – about 4% in the past two days – dealt a blow to appetite for risky assets, and markets across the region plunged amid concerns that Beijing has embarked on a damaging currency war.

The unexpected yuan devaluation saw Chinese stocks slump in Hong Kong, with the Hang Seng China Enterprises Index sliding 2.6%, extending its loss this quarter to 15%. The Shanghai Composite Index lost 1% to 3,886.32 and the CSI300 index of the largest listed companies in Shanghai and Shenzhen fell 1.2% to 4,016.13 points.

Shares in airlines were hit particularly hard as investors feared a weaker yuan would contribute to higher fuel bills. Air China lost 4.4% while rivals China Eastern and China Southern dropped close to 6%.

Contributing to the slump were worse than expected economic figures with fixed-asset investment falling short of expectations. The crucial gauge on the country’s growth came in at 11.2% for the first seven months from the same period last year, according to official data. Economists had forecast a rise of 11.5%.

The International Monetary Fund said China’s move to make the yuan more responsive to market forces appeared to be a welcome step and that Beijing should aim to achieve an effectively floating exchange rate within two to three years.

Beijing has been lobbying the IMF to include the yuan in its basket of reserve currencies, known as Special Drawing Rights, which it uses to lend to sovereign borrowers. This would mark a major step in terms of international use of the yuan.

“Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets,” an IMF spokesperson said.