Although today’s news seems to be fixated on the Greek OXI, the real game-changer is located on the other side of the globe, with the specter of growing illiquidity and rising volatility amongst financial instruments growing larger by the day. To find the true path for the future of financial markets, one needs look as far away as China, where attempts to temper the stock plunge have been feeble, at best. Major benchmarks experiencing uncommon round-trip volatility in the course of a single session is evidence of the inexperienced Chinese retail traders’ herd mentality, and this provides a much graver danger to the world’s economy than the relatively inconsequential macroeconomic danger of Greece.
The summer is an illiquid period at the best of times in financial markets, where the ruling pattern is to sell everything in May before leaving for a lengthy summer vacation. This year, the commotion in financial markets raises the stakes, however, and the global financial system is daisy-chained in a worldwide web of ripples and counter ripples. If China falls, many other countries can hardly be far behind. Several of China’s major trading partners are becoming increasingly inactive in the international trade-sphere and the mammoth nation is failing to move toward a consumption-based economy at a rate that could improve the situation. As a result, policymakers have little choice, and the People’s Bank of China’s latest chain of accommodative efforts is proof that stabilization is a hope being abandoned in lieu of preparations for a hard-landing scenario.
To avert the domestic crisis, China has embarked on a quest for joint infrastructure projects that could re-establish the nation as a sort of Silk Road facilitator of global trade. But that would take time that China’s financial predicaments cannot allow. The People’s Bank of China will most probably introduce quantitative easing in the following months; however, increased volatility is waiting in the wings for global financial markets in the near-to-medium term as markets weigh the impact of a potential Greek exit and a Chinese black swan swimming on the horizon.