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Tuesday, February 27, 2007


chinese shares fall 8.8%

on the back of the bank of japan's interest rate increase last week, the index of chinese a shares collapsed 8.8% overnight, ostensibly in belated response to the government's attempts to slow economic growth and alleviate a raging asset boom gassed by foreign capital and debt.

Market watchers said investors in China were spooked by rumors the government may impose a 20% capital gains tax, while comments by People's Bank of China Governor Zhou Xiaochuan, published in a Chinese-language publication Tuesday, also stirred unease about the prospect for further rate hikes.

"If inflationary pressure increases the central bank should consider monetary policy action, including interest rate policy," the Xinhua Finance news service reported Zhou as saying in the interview, which was published in the Hong Kong Commercial Daily.

Investors were also wary that additional macro-tightening policies could be in the works after the annual session of the China's National People's Congress, which gets underway March 5.

China's central bank lifted the reserve requirement on domestic banks by 50 basis points from Sunday.

"I think the market had gotten a little too expensive and had reached about 26 times forward price earnings, at the top of what we see as a fair value range," Evans said.

but the real fear is the possible disorderly unwinding of the carry trade, which has feuled speculative excess in china's market like few others -- up 174% over the last 14 months.

Markets around the region were pressured by large fund selling, analysts said.

"There may be further squaring of positions in carry-trade portfolios," said Alex To, research director at Tai Fook Securities in Hong Kong. "If Asian markets are on a weakening trend hedge funds are going to liquidate positions and reduce exposure."

this is something i (along with many others) have been nervous about for a couple of years now -- one radical event may rapidly cascade. this is the second shocking downdraft in chinese shares in a month -- emerging markets were lower throughout the region, and all these markets are heavily laden with highly-levered hedge fund capital seeking yield to exploit low interest rates. that capital is hot and volatile, and clearly isn't sticking around through much tumult -- especially as the cost of borrowing in yen has just doubled.

UPDATE: today the yen has rallied, up a shocking 1.7% against the dollar, as hedge funds exposed to asia ex-japan delever, buying yen to pay back loans denominated in that currency. indeed a number of high-yield currencies suffered today -- indicating that some hedgies may be reducing exposure to the carry trade generally.

UPDATE: many of the high-yield markets are being completely crushed today -- brazil down 11.4% -- chile down 6.7% -- mexico down 10.7% -- denmark down 5.2% -- south africa down 5.6% -- greece down 7.5%. all these nations have currencies attractive to the carry trade, and their unified collapse is probably due to the unwinding of global carry trades financed from japan and switzerland. australia, another target, remained unusually unaffected (down 0.74%) but may be forced to catch up tomorrow morning. how asian markets react overnight will be very interesting -- there is certainly room for a rebound rally.

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