Surging short-term borrowing rates in China helped spook global
markets this week, as investors wondered whether slowing growth was
morphing into something more perilous for the world's
second-biggest economy, which has been a key driver of global
demand for the past decade.
Thursday, China's overnight lending rates surged to a record
level of 25 percent at one point, hinting of a potential credit
liquidity crunch risk that echoed what sparked the credit crisis of
China, which seems to be more focused on long-term growth fueled
by structural reforms rather than by a government getting involved
tactically in financial markets, did intervene Friday. The People's
Bank of China released funds to lenders Friday, helping push rates
below 8 percent, according to MarketWatch. The aim was to control
borrowing costs for those in need of short-term cash given that
anxious banks had grown reluctant to lend.
China's economic woes come at a bad time for a U.S. market
that's already struggling with the prospects of a
sooner-rather-than-later end to the easy-money policies that helped
the U.S. economy emerge from its worst downturn since the Great
Depression. The U.S. Federal Reserve this week alluded to the
possibility that its massive bond-buying program designed to keep
long-term rates low and spur growth may be coming to an end as the
economy gains momentum.
Equities, bonds, gold and oil markets all plummeted Thursday and
continued on their downtrend Friday amid concerns that as the Fed
tapers off its intervention, China's government might not do enough
to spur growth there. In the first quarter, China's GDP expansion
came in at 7.7 percent year-on-year, and the latest data including
manufacturing are suggesting that growth rate could slip
are feeling the heat. The $5.6 billion iShares FTSE China 25
(NYSEArca:FXI), the market's oldest equities ETF targeting the
Middle Kingdom, has now fallen 16 percent year-to-date, according
to data compiled by IndexUniverse, and is now trading at its lowest
levels since September.
The fund, which saw net asset outflows of some $30 million on
Thursday, has suffered outflows of $1.83 billion since Jan. 1.
One of its competing funds, the $1 billion SPDR S&P China
ETF (NYSEArca:GXC), is also hovering around nine-month lows. GXC, a
popular China-focused ETF due to its broad coverage of relatively
smaller companies than FXI, has now lost 11 percent of its value
since the beginning of the year amid modest outflows.
In the bond space, the still-small $64.5 million PowerShares
Chinese Yuan Dim Sum Bond Fund (NYSEArca:DSUM) remains the most
popular vehicle U.S. ETF investors are using to tap into China's
yuan-denominated government and corporate bonds issues outside of
China. The nearly two-year-old fund has seen gains of 2.5 percent
Similarly, the Market Vectors Renminbi Bond ETF (NYSEArca:CHLC),
which targets dim sum bonds with higher credit quality, has tacked
on gains of 1.5 percent in the same period.
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