A wild day indeed yesterday it was.  We witnessed a sharp rally in the Japanese yen, suggesting we may be seeing some unwinding of the yen carry trade. 

And the culprit for the rally in yen, and oh yeah, the 400+ point shellacking of the Dow Jones Industrial Average, and the safe haven stampede into bonds, was a 9% fall in the Chinese stock market.  The concern is that Chinese policy makers may be getting serious about applying the brakes to their economy—this means there will be less credit available for speculation and corresponds to growing risk the future won’t be like the past. 

Yesterday’s debacle, which reverberated across every major asset class and global market, was “engineered” by Chinese officials.  The Chinese know their market is ridiculously overvalued and has become a game of pure speculation. Chinese investors are mortgaging their homes to buy stocks—that’s scary stuff. 

This is a comment I read from Stratfor.com, an international consulting group, I think it’s right on the money:

“The Chinese government has become increasingly concerned about levels of investment in its economy or, more accurately, the sheer amount of money that is chasing projects. State firms with limitless access to subsidized capital from state banks have used that access to launch thousands of nonprofitable firms. This glut in ‘investment’ money drives up the cost of commodities and adds industrial capacity without actually producing anything of much use, making life more difficult for the average Chinese and unduly harming relations with foreign powers that face a glut of otherwise noncompetitive Chinese goods.”

Now that the Chinese have shown just how much they can impact global markets, at their whim, it adds a whole new layer of risk for players in the market do deal with.  And as I’ve said before, the unwinding of the yen carry trade is all about risk.  Yesterday’s price action proved that in spades.