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- Yen arbitrage risk for stability: research
Date: 23-Nov-2007 Sources: (Shenzhen Daily)
ANY large unwinding of Japanese yen carry trades could pose significant risks to China's financial stability and the yuan, according to a recent research paper published by the Ministry of Commerce.
Currently, investment from arbitrage, or carry trade, that involves borrowing funds at Japan's low interest rates, then investing them in higher-yielding assets, target emerging markets, 'with China being the preferred destination,'according to the essay.
The essay comes as China faces a chronic liquidity problem from fund inflows that is putting upward appreciation pressure on the yuan and pushing up domestic inflation.
When asked about the essay, Ministry of Commerce spokesman Wang Xinpei said Thursday that he had not seen it yet. Research papers are often issued by government or quasi-government research arms that don't always represent official thinking, though they may indicate policy direction or concerns of policymakers.
China's rapid economic growth and expectations for the yuan to appreciate, 'offers arbitrage funds boundless imagination,'the essay said.
The yuan appreciated 17.4 percent against the Japanese yen between July 21, 2005, and June 1, 2007, according to the essay.
The interest rate differential between the yuan and yen is about 2-3 percent, which implies at least a 21 percent return on bank deposits, but sharper 100-300 percent returns on investments in Chinese property or stock markets, it said.
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