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November 16, 2009

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Dollar 'carry trade' fuels worry

CHINA'S top bank regulator said yesterday the weakening United States dollar and low interest rates are spurring speculation in stocks and property, distorting global asset prices and threatening the global economic recovery.

The situation poses an "insurmountable risk to the recovery of the world economy," Liu Mingkang, chairman of the China Banking Regulatory Commission, warned yesterday.

Speaking at a conference in Beijing, Liu said the declining US dollar and reassurances by officials that interest rates will remain low were encouraging a "massive" US dollar carry trade - the practice of borrowing money at low rates in one currency to invest in assets in another currency that offer a higher return.

The carry trade is "dealing a serious blow to global asset prices and fueling speculation in the stock and real estate markets," he said, according to a transcript of a speech he made at the financial forum in Beijing, posted on the Website of Hong Kong's Phoenix TV.

The US dollar has declined steadily since spring despite statements of support from American officials.

China is the largest foreign holder of US debt, mostly in Treasury securities, which have declined in value as a result of the dollar's weakness.

At the same time, record-low US interest rates, intended to encourage lending to businesses struggling to recover from the recession, are spurring investors to transfer funds out of the safety of low-yield dollar-denominated investments such as Treasury securities and into higher-yielding assets like stocks, commodities and emerging-market currencies.

Strong flows of such funds into China's markets, where share prices have surged by more than 70 percent this year, and property have raised worries over a possible bubble in asset prices.


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