China, Japan in anxiety over US investments

by **Cals** Mon 14 Oct 2013, 09:49

Published: Monday October 14, 2013 MYT 12:00:00 AM
Updated: Monday October 14, 2013 MYT 7:06:02 AM
China, Japan in anxiety over US investments

CHINA and Japan, the two largest investors in US Treasuries, are now beating their chests in remorse and anxiety, as the United States goes into shutdown and potential default mode.
China holds US$1.28 trillion (RM4.07 trillion) in US Treasuries, followed by Japan, which holds US$1.14 trillion, according to the International Herald Tribune, quoting the Treasury Department.
Senior officials from both countries have made powerful statements in recent reports spelling their concerns over the political infighting in Washington and its potential impact on their massive investments.
In fact, China was looking at ways to move its huge dollar-denominated investments into the private sector and out of the Government’s coffers before the current crisis began, said The Guardian, quoting Daniel Rosen, founding partner of the research firm Rhodium Group.
“But for the moment, they are trapped and they have to deal with the portfolio they have,” said Rosen.
This latest lesson again indicates that big is not necessarily beautiful.
Jamming so much money into a single large economy is too risky, especially when the fundamentals in the politics of that economy are not strong.
Both countries now have to play the waiting game and hope for the best.
Hopefully, this will not have a long-term effect of destabilising Asia, as two of its largest economies – China and Japan – are involved.
Reports said Washington was trying to hammer out a temporary solution to the looming debt ceiling deadline.
Apart from the current government shutdown and potential debt default, another issue facing the markets is the impending halt to US government stimulus.
A study by the Institute of International Finance (IIF) indicates that private capital flows to emerging markets are set to fall in 2014 to their lowest since the global financial crisis, as expectations grow for an unwinding in US Federal Reservestimulus.
Tighter US policy and weaker growth in emerging markets would reverse the main drivers that had sent foreign investors piling into emerging debt and equities in recent years, said the IIF.
The IIF cut its forecast for private capital flows to emerging markets to US$1.11 trillion in 2014, the lowest since 2009, from an estimated US$1.15 trillion this year, said The Guardian.
In fact, countries at most risk of capital flight were advised to beef up their defences before it is too late, reported The Telegraph, quoting Karl Habermeier, theInternational Monetary Fund’s head of capital markets.
Emerging markets must learn their lessons from over-reliance on hot money.
There is actually no short cut; they have to beef up their fundamentals and undertake structural reforms to be sustainable.
When it is time to uproot, these foreign funds will usually find a story in emerging markets’ weaknesses.
Investors have to be very wise and nimble when dealing with such storytellers.
They must know how to take advantage of market rebounds like in the United States, which is leading the rapid growth in wealth.
A study by Credit Suisse indicates that global wealth has reached an all-time high this year, led by North America.
Investors in North America benefited from rising property prices and a bull market in equities that drove the Dow Jones Industrial Average to record peaks, reported theSouth China Morning Post, quoting Credit Suisse.
People in the United States had the greatest combined increase in personal wealth in the year to June, US$8.1 trillion, which is 12.1% higher than a year earlier.
This was followed by China, with US$1.4 trillion, up 6.7%, the Swiss bank’s latestGlobal Wealth Report shows.
The world’s total wealth rose to US$241 trillion, and wealth per adult stood at US$51,634, the first time that figure has passed the US$50,000 threshold since 2007.
Of US dollar millionaires worldwide, China accounts for 4% and seems likely to overtake leading European countries, including Italy, Britain, France and Germany within a decade, according to the report.
The US economic recovery was only in the initial wobbly stages, but investment money had already poured in to reap the early benefits.
However, the effects of this increased wealth creation are patchy; the existing pockets of poverty only accentuate the gap between the rich and the poor.

Columnist Yap Leng Kuen is reminded of the fact that large pockets of poverty and hardship remain.