- Risk, volatility
Market swings that characterize economies with deepening financial systems – The US in the 1980s and Europe in the 1990s – are now being seen onshore in China but on a much different scale and at a much different point in its development. The mid-point of 2015 demonstrated that equity volatility originating in China can quickly spread to the rest of the world; this represents the first occurrence of a phenomenon that must be considered by operations out of New York and London. This environment is not going to disappear and cannot be ignored.
- Volatility is symptomatic: Market swings are just part of a wider set of uncertainties that affect all aspects of the Chinese economy; not just its financial system. The lack of transparency also makes operating in this environment more difficult for participants.
- Impacting other markets: Although China’s financial markets have long been functionally closed off from the rest of the world, more fundamental transmission mechanisms have allowed volatility originating in China to spread quickly elsewhere.
- Risk mitigation: Operations in China and Hong Kong can be structured to better inform headquarters of market moves; and risks originating from Chinese financial markets can be managed, even by firms which lack an onshore presence.
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