The People's Bank of China (PBOC) is engineering the move at present. The risk is if they overshoot. Not enough action will not accomplish their needed correction to brush back the carry traders. Too much and the trend becomes self sustaining and China's economic Humpty Dumpty comes off the wall. Morgan Stanley's Kendrick posted this note:
The potential for US$4.8 billion in losses for every 0.1 above the average EKI could have significant implications for corporate China in its own right, as could the need to post collateral on positions even if the EKI level is not breached.The relevant danger level in the EKI is 6.2 and the chart looks like this.
However, the real concern for corporate China is linked to broader credit issues. On that, it’s worth reiterating that the corporate sector in China is the most leveraged in the world. Further loss due to structured products would add further stress to corporates and potentially some of those might get funding from the shadow banking sector. Investment loss would weaken their balance sheets further and increase repayment risk of their debt.
In this regard, it would potentially cause investors to become more concerned about trust products if any of these corporates get involved in borrowing through trust products. In this regard, this would raise concerns among investors, given that there is already significant risk of credit defaults to happen in 2014.