Continued Japanese Carry Trade Could Hit China

June 9, 2007 (LPAC) If the yen keeps falling against the dollar counter to every other world currency, and were China to end its foreign exchange controls, China itself could be hit with a yen-renminbi carry trade that would send its already huge foreign reserves skyrocketting to $3 trillion, Chinese financial analyst Wan Xiaoxi warned in an interview with China Business News published today.

Wan Xiaoxi, an analyst with China Southern Fund, said that the current, continued fall of the yen, is encouraging the yen carry trade and exacerbating international imbalances. He called the continued fall of the yen a "malevolent depreciation," and obviously counter to the steady rise of the RMB and every other leading currency. "All the world's major currencies are appreciating against the dollar -- except for one. The fact is that the currency of the world's second largest economic power has been devalued since 2005 a malevolent way, and this is the major cause of the global imbalance," Wan said.

Were there to develop an "RMB carry trade," China's forex reserves, already some $1.2 trillion, the largest in the world, might blow out to $3 trillion in two to three years, warned Wan. Of course, China's government has been emphatic that "reform" of China's international currency policy will be carried out at some future time, and under controlled conditions.

Wan pointed out that Japan's trade surplus, about the same as China's in 2005 at $160 billion, in the first half of 2006 fell below China's. This is due to the fall of the yen, while the Chinese RMB is slowly rising: it has appreciated 5.8% against the dollar, and 14.6% against the yen since the trading band was widened in July 2005. The yen interest rate is 2%-3% lower than the RMB, giving fairly high returns for carry trades between the two currencies. If China ends is forex controls, this could lead to an explosion of its forex reserves.