China Slowdown Bodes Well For Safe Havens. By Nicholas Hastings

China has slipped into the driving seat and the omens aren't good.

For most of the summer, China has been more of a back seat driver, with financial markets driven largely by hopes of a global economic recovery.

However, growing evidence that Beijing has now got the steering wheel and is slamming its foot on the economic brake is taking its toll.

A sharp decline in the Shanghai Composite Index, which has fallen as much as 15% since the end of July, has turned into a leading indicator for other markets and brought a swift end to the recovery in risk appetite.

As a result, safe havens such as the dollar and the yen are likely to be back on the buying list with high-yielding commodity currencies such as the Australian dollar hitting the skids.

Just how much Beijing plans to curb Chinese growth is unclear.

Earlier this week the vice-head of the country's Development Research Center stated that stock markets were over-reacting to slowdown fears.

But, that hasn't stopped global equity markets from falling.

The latest decline came after the State Council made it clear that it is concerned about overcapacity in major industries such as steel and cement. The council is now expected to implement curbs on lending and licenses that will reduce growth even further.

Its move is hardly surprising.

After embarking on a CNY4 trillion stimulus program earlier this year and encouraging banks to lend as much as CNY7.7 trillion in the first seven months of this year to help pull the global economy out of recession, Beijing is now worried about asset prices getting out of hand and is trying to slow the expansion down.

The fallout is not only evident in other major equity markets but also in the price of commodities which are now heading lower given that the Baltic Freight Index -a key indicator of international trade - has been in decline for five consecutive weeks.

Whether market fears over China's slowdown are justified or not, the issue has become a primary driving force for sentiment with the Shanghai Composite leading the way down.

As Simon Derrick, a senior currency strategist with Bank of New York Mellon in London, warned: "The risk is now that a more sustained downtrend could lead investors to start pulling back from other related markets."

Early Friday, the Shanghai Composite fell another 3.5% as data showed that the Japanese unemployment rate hit its highest level since 1953 and that deflation persists with prices falling 2.2% over the last year. All this hardly bodes well for the global recovery.

The dollar rose to Y93.98 by 0645 GMT from Y93.50 late on Thursday in New York, according to EBS.



The euro eased a little to $1.4357 from $1.4362 but rose to Y134.87 from Y134.22.