Concern about the slowdown in China’s economy and Beijing’s tenuous policy responses have been the primary driver of the past two big slides in global equities. Throw in the uncertainty about what Saudi Arabia might or might not do to stabilise oil prices, and investors should brace for extreme volatility in markets.
This volatility reflects an overreaction to the slowdown in China, but the absence of a clear strategy for the devaluation of the renminbi has not helped. What was billed as a one-off currency change last August has morphed into a series of depreciation measures against the US dollar.
China is undergoing significant transition. It is attempting a shift away from an export-driven and investment-led economy to a more balanced, consumption-oriented one. To achieve its goals and double gross domestic product and GDP per capita by 2020 from 2010 levels, the leadership has set out an extensive reform agenda. This includes further financial market liberalisation and state-owned enterprise, fiscal and rural land reform. Such widespread transition brings risks and significant uncertainties. A complex and interconnected reform agenda has never been achieved on this scale or at this speed.