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No safe havens in global financial storm

(People's Daily)

16:12, August 24, 2011

Edited and Translated by People's Daily Online

The U.S. and European debt crises and widespread worries over a prolonged global economic slowdown have jointly sent global financial markets into turmoil. As U.S. bonds and many other assets are nowhere near as reliable as they once were, frightened investors worldwide are eager to find new safe havens.

A safe haven refers to a country or a financial asset that is seen as providing investors with a shelter from rising market risk. In fact, what constitutes a safe haven is a subjective matter. Investors have different preferences for avoiding risks and may see different countries or assets as safe havens. Since 2008, whenever there were considerable market uncertainties, capital has shown a tendency to flow away from stock markets into what are perceived to be safe havens, such as gold, U.S. government debt, yen and the Swiss franc. U.S. debt used to be the ultimate safe haven because of its high credit rating, large market size and good liquidity.

Global financial market trends in recent weeks have shown that traditional safe havens have not been abandoned. Ironically, after the historic downgrade of the U.S. credit rating, global investors snapped up new U.S. bonds instead of unloading old U.S. bonds. In fact, it is not hard to understand this counterintuitive market reaction. U.S. debt remains sought after not because the U.S. economy is in a good situation but because investors have few choices for alternative safe havens.

More specifically, European debt is even less reliable than U.S. debt, and yen assets have become highly risky. The Swiss economy is relatively small and close to the euro zone, so it can easily become embroiled in the euro zone crisis. In addition, the unilateral increase in gold prices cannot last long. Many financial experts have warned that the gold bubble could burst at any time.

In their search for new safe havens, investors have turned to emerging Asian economies' currencies. Although Asia's capital markets have failed to be immune to the panic resulting from the U.S. sovereign credit rating downgrade by Standard and Poor's, Asia’s asset values have appeared to be more resilient and major Asian emerging economies' currencies have recently appreciated considerably. Given the recent market moves, it is not difficult for people to conclude that Asia is very likely to become a new safe haven.

The main reasons why investors are optimistic about Asian economies' currencies lie in relatively strong balance sheets of governments and enterprises in the region as well as their much faster economic growth than that of developed economies. Asia's central banks have the world’s largest amount of foreign exchange reserves to sustain their financial systems. Meanwhile, the U.S. Federal Reserve has said that it would keep main U.S. interest rate near zero over the next two years, making Asian emerging countries' currencies with higher interest rates more attractive.

Currently, the phenomenon of international capital flowing into emerging markets of Asia to hedge risks has not appeared yet because Asia does not have foundations for it. Some economists believe that the supervision barrier is the main obstacle that stops investors from putting their capital in Asia. Out of the consideration of financial security, most emerging-market countries of Asia have implemented capital control measures or other restriction measures at different levels.

These countries are all very sensitive to the hot money flowing in, and some of them have strengthened their capital-control measures since last year. For example, in order to alleviate the pressure brought by capital flowing in, some have imposed taxes on the profits gained by foreign capital investing in their bond markets.

In addition, the domestic currencies of the emerging-market countries of Asia are not internationalized, and the assets that foreign investors are able to buy are quite limited in both type and quantity. According to data from the Asian Development Bank, the total size of the currency bond markets of Asia's emerging-market countries is 5 trillion U.S. dollar, which is extremely small compared to the U.S. bond market size of 31 trillion U.S. dollar. More importantly, the financial markets of Asia’s emerging-market countries are still much less mature compared to those of Europe and the United States. For example, some of them have not established the Short Sales Mechanism or have established it but do not allow foreign investors to participate in it.

In a word, it will be a medium-and-long-term process of international capitals flowing into Asia's emerging-market countries. At least, Asian currencies are still not a risk-hedging heave

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  1. Name

Ferdinand at 2011-10-1986.165.104.*
Capital does what capital must do. The vast majority of us who don"t possess capital nee to consider our options.
A Wise Man Once Said at 2011-08-2766.58.203.*
The only safe haven in this or any financial storm is land. Now, I am not talking about land that is overpriced or land that is leveraged with inability to pay any more than I would be talking about a house overpriced or overleveraged and no ability to pay. Of course in time of famine this would mean debtless. I am talking about developed land as well as undeveloped land.Land is more valuable than anything that we choose to give financial value to in our society. Gold, diamonds, platinum, oil, stocks, bonds, etc. are all worthless compared to land.Why would I say this you might be thinking right now? Well, the very simple explanation is that in times of famine, the only things that have value are places you can live, eat and sleep. If you have a chicken and I have rice then we have a deal. But if you have gold, well, sorry but I need food not gold.I would venture to say that is near to impossible to plant anything that you can eat on a gold bar. And I guess you could build a shelter on a gold bar but man it would either be very small or you would have to have a gold bar almost as big as Ft Knox.While most other investments have a "use" value, for the most part they are emotionally valued asset. Land appreciates in both a feast or famine situation. It offers more than just financial returns while other assets have a fallout-point in both the low and high ends. Land gives us security across the entire scale in good and bad time while other investments are only limited in scale.Over time, land is the best investment. Nothing can match its weight.
ari.gon at 2011-08-25188.138.91.*
This is a false fear. America"s rich park their billions and trillions all over the world. Why are the rest of the world made to believe that they must park their money in America? Why not park it in the IMF or the WB or bonds in Beijing, Australia, Russia, China, etc.? I surmise this false and misleading fear is a bogey to frighten Beijing, Tokyo, Kuwait, Riyadh etc., into paying for the huge U.S. military and welfare expenditure. At our expense. I am sure some bright chap at the IMF or UN or WB can come up with an idea how the world"s surplus can be invested. There can be a"world central bank" which can absorb these surpluses for loan to sovereign countries. The that rating comapnies like Standard & Poor, Moody, Fitch, and Dagong, will have a real role to play.
  

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