Many argue that markets are entering uncharted waters since they are called to tread in the volatile environment that looks very much like an active minefield, due to the changes in the monetary policy in the USA coupled with the slowdown in the Chinese economy.
The question that begs answering and to which a response cannot be practically given yet following the violent drop in the markets on Monday due to the closing of the Shanghai Stock Exchange, is whether what we are experiencing right now is a period of adjustment to the new realities or a pre-seismic episode, acting as a warning for a major catastrophe ahead.
Many analysts agree that the atmosphere in the markets in 2016 is increasingly tense and makes them ready to overact to any unexpected event, such as that of the decline in the Chinese market, due to a distinct combination of decisive factors. The proponents of this narrative turn their attention to the environment created by the recent change in the monetary policy followed in the USA and the turn in the trend for shaping the dollar interest rates.
It is true that the decision of the Chinese Central Bank not to renew the funding line to the China Development Bank was the immediate reason for the explosive reaction of the markets, thus forcing the Chinese watchdogs to shut down the market for one day while simultaneously injecting around 20 billion dollars into the market in order to halt the consequences.
The Chinese authorities were also forced, for the same reasons, to announce that it is quite possible that they will extend the restrictions in the “disinvestment” of the institutional state actors from the stock market.
However, the main reason that the selloff in the Chinese markets took on such a violent form at the opening of the New Year does not begin nor end in the financing of the China Development Bank.
They rather have much more to do with the overall climate that has been created for the coming months and concerns the behavior of the capital markets between the center and the periphery following the given decision by the Fed to gradually increase the cost of (US dollar) money.
Many view the reactions as the start of the week or even those of the summer – again in response to events in China – as a kind of warning or a spasmodic adjustment of markets to the new environment which is undoubtedly affected (if not determined) by the Fed’s decisions.
Some more anxious experts – especially in the Asian markets – consider the combination of the increase in interest rates by the Fed with the now certain slowdown in the Chinese economy as “a minedfield that markets need to cross in the year 2016” without the certainty of a security system provided by central banks.
Hence, they claim that this new reality explains the violence of reactions and the sudden changes in the direction of capital flows in international markets that occurred.
This uncertainty in attitudes was also reflected in the speed with which the consequences “transferred” not only between stock markets at the center and the periphery, but also between different markets such as the foreign exchange and the bond market.
Given that China is the world’s largest economy after that of the US, the decision of the Chinese Central Bank to “spend” approximately 20 billion dollars in just 24 hours in order to curb the effects of the crisis is recognized as a strong sign of its determination to keep control of the situation. However, even more important than this determination is the fact that China’s economy with all its contradictions is currently “sitting” on a double debt mountain, their own and that of the US in which the overwhelming part of its reserves is invested.
Which means that the impact of the “big exit” of funds, not like in the 1981-1982 crisis, but this time from the periphery, will definitely carry with it the damages to the metropolitan centers. This is a particular minefield that capital markets have not crossed ever before.
And although none should underestimate the fact that after 2008 central banks have certainly become “wiser” and more “experienced”, it is also true that for the time being it is almost impossible to evaluate and assess the dangers created by the autonomy of capital markets, which have in the meantime being “feeding on” at least six quantitative easing programs since the fall of Lehman Brothers, three from the USA, two from Japan and one which is still in place from the Eurozone.