Last week worldwide markets fell by between four to eight percent, while the Shanghai stock exchange had its biggest fall in a decade on Tuesday and Wall Street had its worst day since the aftermath of the September 11, 2001 attacks.

Investors appeared to refocus on some of the weak spots of the global economy while worrying about the end of a stock market bubble in China and slowing economic growth in the United States.

The fundamental concerns are imbalances in global capital and trade flows and the risk of a sharp fall in the US dollar.

In 2006 the United States for the fifth consecutive year posted a record trade deficit of 764 billion dollars (580 billion euros), which was fueled by an appetite for foreign-made goods, especially from China (31 percent of the deficit) and Japan (12 percent).

The trade deficit means that two billion dollars leave the United States per day.

The dollar should fall as a result, particularly against the yen, but the low level of the Japanese interest rates has meant the opposite -- currency is leaving Japan.

IMF director-general Rodrigo Rato said last week that the yen was at its lower level in 20 years in real terms and warned against the "yen carry trade."

Carry trade happens when investors borrow in the yen, which is cheap because of low interest rates, and invest in assets in high-yielding countries such as the United States, Britain or Australia.

Although this creates windfall gains for investors it also causes a risk of a sudden reversal in financial flows, Rato warned.

The Japanese central bank could risk raising its interest rates, which have been kept artificially low in an attempt to resolve the housing crisis and deflation that have gripped the country for 16 years.

But higher rates would risk killing off a nascent economic recovery in the country.

The Chinese central bank wants to prevent the dollar falling against the yuan and regularly buys US treasury bonds.

The spending by China on US treasury bonds has kept long-term interest rates in the United States at a low level, keeping mortgage rates down and boosting the US consumer.

But the American housing market is also seeing a slowdown and the large number of high-risk borrowers, those of low creditworthiness, pose a financial risk for financial markets, according to a report published by an American association of business economists.

The Chinese government appears to want to burst the speculative bubbles that have built up during years of strong growth and decided last week to raise bank interest rates by half a percentage point to ten percent.

"The monetary policy normalisation in China looks safe and well thought out," according to analysts at French investment group Française des Placements.