Why Japan's More Worrisome Than China
A lot of wealth has vaporized in recent trading sessions, as investors have been swept up in a wave of selling in global equity markets that started in China on February 27. Sell-offs has moved across most of Asia, Europe and the US, and some $1.5 trillion in m-cap has been wiped out. Concerns about the quality of the 'sub-prime' US home mortgage market and possibility of recession in '07 fed the selling trend. But two of the biggest market risks are believed to be centred in Asia. The importance of China's $2.7-trillion economy to global growth, trade flows and corporate profits has some worried about the negative impact of a downturn in Chinese equities.
There is the disturbing prospect of a messy unwinding of hundreds of billions of dollars' worth of highly leveraged trades in risky emerging-market investments and US dollar assets that have come from the ultra-cheap yen, thanks to rock-bottom Japanese interest rates since the late 1990s. This is a result of the so-called yen carry trade - in which investors borrow in yen, flip over into foreign currencies and invest in non-Japanese bonds and stocks. How real are these risks? Here's a background to guide investors through volatility in global markets.
Why China?
It's ironic that the 9% plus slide in the Shanghai & Shenzhen 300 index had such a big impact on global markets. For one thing, its causes were homegrown. Share prices at these two mainland markets had jumped 130% last year, and valuations were absurdly high. Analysts had been calling for a 15-20% correction for months. These markets are powered by Chinese investors who aren't allowed to invest abroad, so they aren't influenced by trends in the US or Japan. Nor do foreign investors have a huge stake in the A-share market. The selling was mostly domestic-driven and influenced by the People's Bank of China move to raise required cash reserves that lenders must park with the central bank.
“Global investors may be far too worried about the market risks from Chinese stocks, but unwinding the 'yen carry trade' could prove bumpy”
A lot of wealth has vaporized in recent trading sessions, as investors have been swept up in a wave of selling in global equity markets that started in China on February 27. Sell-offs has moved across most of Asia, Europe and the US, and some $1.5 trillion in m-cap has been wiped out. Concerns about the quality of the 'sub-prime' US home mortgage market and possibility of recession in '07 fed the selling trend. But two of the biggest market risks are believed to be centred in Asia. The importance of China's $2.7-trillion economy to global growth, trade flows and corporate profits has some worried about the negative impact of a downturn in Chinese equities.
There is the disturbing prospect of a messy unwinding of hundreds of billions of dollars' worth of highly leveraged trades in risky emerging-market investments and US dollar assets that have come from the ultra-cheap yen, thanks to rock-bottom Japanese interest rates since the late 1990s. This is a result of the so-called yen carry trade - in which investors borrow in yen, flip over into foreign currencies and invest in non-Japanese bonds and stocks. How real are these risks? Here's a background to guide investors through volatility in global markets.
Why China?
It's ironic that the 9% plus slide in the Shanghai & Shenzhen 300 index had such a big impact on global markets. For one thing, its causes were homegrown. Share prices at these two mainland markets had jumped 130% last year, and valuations were absurdly high. Analysts had been calling for a 15-20% correction for months. These markets are powered by Chinese investors who aren't allowed to invest abroad, so they aren't influenced by trends in the US or Japan. Nor do foreign investors have a huge stake in the A-share market. The selling was mostly domestic-driven and influenced by the People's Bank of China move to raise required cash reserves that lenders must park with the central bank.
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