The Key Reasons Behind The World’s Turmoil

World financial, commodities and currency markets have experienced turmoil since last Wednesday, 19 August, as anxiety over world economic prospects grown.

Among the hardest-hit, Chinese stock markets plummeted dramatically in two straight days, crashing to its lowest marks since December 2014 before bouncing a bit.

Analysts pointed out that the global markets’ dive is connected to the prediction of a possible hike in the Fed’s interest rates and uncertainties of the world economic recovery, and not directly linked with China’s economy.

Though the dive of global stock markets was may have been triggered by China’s volatile markets, the fundamental reasons are the anxiety was aroused by interest rate hike predictions and fragile world economic recovery.

Since Y 2008 financial crisis, Chinese economy has acted as a stabilizer for global economy, and the recent adjustment to the RMB exchange rate mechanism made international investors uncomfortable.

With the prediction of the Fed’s interest rate hike, currency value of countries like Russia, Singapore, Malaysia and other emerging economies have fluctuated severely over the past months. And the ongoing uncertainty about the timing of the interest rate hike may have exacerbated the fluctuations.

Russ Koesterich, global chief investment strategist at Inc. (), the world’s largest money manager, believed that the latest financial markets’ slump is a lagging response to multiple negative information, and is a combined result of concerns of investors over global economic outlook.

In fact, global economic recovery is still fragile and uneven, as developed countries, after the Y 2008 financial crisis, sought to use QE (quantitative easing) policy as a major measure to bolster their growth, which resulted in twists and relapse of the world economy.

However, the concern over Chinese economy is overdone. In terms of economic fundamentals, the Chinese government has ample space to unleash its most potent interventions, The Economist said.

Despite the weak performance of manufacturing and real estate, the rapid growth of the service sector is becoming the new highlight of China’s economy.

The chief economist at the International Institute of Finance in Washington, dismissed the suggestion of another global financial crisis in the air.

He said “there are enduring factors that do imply a more enduring impact on the global economy,” but after the Y 1997 financial crisis that hit Southeast Asian countries, emerging economies freed up their currencies and capital markets, and their companies stopped depending excessively on what were once cheap loans.

In addition, those countries enjoyed an adequate (foreign exchange) reserves, analysts said.

What is important now is that all countries around the world unite and work together to manage and surmount the current problems, avoid the harmful results of competitive currency war, and capital markets’ contagious dive.

Stay tuned…