the chinese stock market is impacting on the world market

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a short view form the market comment by John Authers in the FT.

as markets tried to find a level yesterday after more heavy selling in Aisa, one question was easy to answer. how, people wanted to know, could last tuesday's 9 percent fall in chinese stocks possibly have caused such mayhem across the world? the answer : it didn't.

shanghai's tumble was a shock and helped crystallise anxitety. but china 's relatively illiquid market is not driving the continuing turmoil. at the yesterday's close, shanghai's composite was still up more than 4 percent for the year. that compared with declines for all main developed markets and double-digit declines for india and Russia. in spite of initial appearance, this market break was not "made in china".

that leads to two harder questions. what did cause this? and is this just a correction, or the start of something worse? the parallels with last May's drastic sell-off, which turned out only to be a correction. offer some tentative answers.

so far- with stock markets steadying a little in late european trading yesterday-this has not been as serve as May. then, the MSCI emerging markets index fell 24.6 percent in five weeks, before resuming its rally. yesterday moring. the index was down only 7 percent from its peak- at almost the level from which it started its correction last year. nothing et to imply that this will be worse than a correction, then.

now look at th correlation with the yen. trader's greatest concern yesterday was the unwinding of the yen carry trade- borrowing cheaply in yen and investing in higher yielding currencies- would lead to forced sales of other assets/

carry traders lose money fast if the yen rises- and in the past week it rose almost 6 percent against the dollar. last year, an 8 percent appreciation in the yen. starting in April, helped trigger the sell-off.

yesterday the yen hit 115.2 to the dollar, but then subsided beyond 116. it could be a false correlation, like last week's link between the sell-offs in shanghai and new york, but that slip by the yen coincided exactly with an afternoon recovery in european stocks.

so look at japan, not china. if the yen continues to rise, the correction could turn into sonething worse. will it?

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