Risk Management, Trading & Portfolio Strategies

China fears fueling global market volatility

Global investors are skittish about recent negative developments in China's economy.

Global investors are skittish about recent negative developments in China’s economy.

Investors with exposure to Chinese assets, interests and liabilities have been watching global market movements with increasing fear since rumors emerged last week that the People's Bank of China is beginning to buckle under the pressure of the Communist nation's surging shadow banking industry. This subset of its financial sector, where many inter-bank lending and risk management operations take place, has grown massively in the last decade and could lead to a Lehman Brothers-style failure that may fuel further volatility worldwide.

According to the Los Angeles Times, the news out of Beijing has been overwhelmingly negative during the past few days. On June 24, the Shanghai Composite Index plunged 5.3 percent as global investors began to position themselves in case further losses occur. Given the structure of China's economy – with a major emphasis on state-supported manufacturing and construction – such instabilities could deteriorate more if the global economic picture fails to improve. Coupled with recent comments from Federal Reserve Chairman Ben Bernanke about the so-called "tapering" of the American central bank's quantitative easing program, those with a financial stake in China are beginning to prepare themselves for the worst.

Yet before investors succumb to the spreading fear, it's worth noting that the current Chinese leadership team is more pro-active about economic problems than the previous one led by then-Premier Hu Jintao. President Xi Jinping, the source reported, have been seeking ways to encourage "market liberalization" that may ease doubts.

As these problems go their course, some investors may want to give themselves the capability of reacting more efficiently when risk rises significantly. SmartStops are an effective tool against risk, as they keep investors informed about negative changes in their portfolio and the wider markets in which they operate. Keeping an eye on the Risk State of a given stock, for example, allows individuals to watch for signs that may call for a necessary adjustment.

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