Asia Crisis Deepens: Japan Enters Bear Market, China Yuan Threatened

Japanese stocks officially entered a bear market on Wednesday and continue to see pressure, despite quantitative easing measures that propped up stocks in years past.  The Japanese Topix index fell 3.7 percent in a day and lost over 20 percent of its value from its peak last summer. The Nikkei 225 fell a similar amount by the close, leading to an almost 14 percent year-to-date loss.

Japanese stocks officially entered a bear market on Wednesday and continue to see pressure, despite quantitative easing measures that propped up stocks in years past.  The Japanese Topix index fell 3.7 percent in a day and lost over 20 percent of its value from its peak last summer. The Nikkei 225 fell a similar amount by the close, leading to an almost 14 percent year-to-date loss.

The steepest declines were in Hong Kong, which had an unusual 3.5 percent drop on Wednesday, with losses topping 4 percent at the worst moment of the day. The Shanghai Composite Index fell a little over 1 percent, outperforming Hang Seng—an unusual event that some analysts are attributing to a safe haven run into the Hong Kong Dollar.

China’s Currency Problem

China’s renminbi has seen accelerated weakness as the country has loosened its grip on the currency and seen a flight towards safer havens. The renminbi erased all of its gains over the last four years to trade at 6.58 against the dollar—its lowest level since 2012.  Still, some analysts and investors believe the currency should fall much further. Corriente Advisors’s Mark Hart said the currency should devalue by over 50 percent in 2016—and the Chinese government needs to make the move.

Hart, who correctly predicted the U.S. subprime mortgage crisis and European sovereign debt crisis over the last decade, told Real Vision that China should not be forced “to suffer deflationary effects of defending its currency when everyone else isn’t.”

He argued that China should be allowed to weaken its currency after quantitative easing in Japan and Europe, which is now failing to fuel asset bubbles in those markets, has weakened those currencies, pushing the U.S. dollar higher.  This, in turn, has made it hard for China to manage its foreign exchange reserves and limit yuan shorting.

“If China were to devalue to a level that wasn’t actually a true equilibrium they will get run over pretty quickly, they will blow through FX reserves, and then they will lose face because they’ll be forced to devalue,” Hart said in the interview.

Hong Kong Property Concerns

Amidst pressures from the mainland and continuing strength in the U.S. dollar, the pegged Hong Kong Dollar fell to almost the lowest rate in its target range possible. Speculators fret that the Hong Kong government will need to raise interest rates to defend its dollar peg that in turn would make borrowing more expensive. That would cause pain in the already weak Hong Kong government, where real estate prices have begun to fall and expect to fall further.

To avoid a spiraling crisis, the Hong Kong government could abandon its historical peg to the U.S. dollar, which has helped make the city the financial hub of Asia. However, some analysts say this peg is no longer necessary, as international markets, and the rise of Singapore, have changed to make the peg less necessary.