Strategy Video: Volatile Chinese Markets Face Systemic Risks
• Chinese officials threw the kitchen sink at the collapse in equity markets and won temporary reprieve
• Stimulus, however, does not solve underlying issues that continuously feed bubbles in new areas
• From exchange rates to credit to housing and now capital markets, the music will have to stop sometime
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China represents one of the greatest systemic risks to global financial markets today - and that is accounting for other sparks like Greece and Fed hikes. The backbone of economic recovery from the Great Financial Crisis, China managed to power through the previous mass-deleveraging by ramping up the availability of cheap capital throughout the economy. However, for a country more dependent on global demand (trade) and manufacturing; this would mean an inefficient investment. Leverage in questionable businesses, infrastructure projects and real estate generated an obvious financial bubble. The most recent fix was to open the tap to another area of the financial system: equities. This shift of risk has just diversified its influence, and the greater risk will eventually play out with serious ramifications to global risk sentiment. We look at the risk China poses the world in today's Strategy Video.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.