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Jack Rasmus – Today’s Global Financial Faultlines

In the past year the stock markets in China erupted, contracting by nearly 50% in just three months, after having risen in the preceding year by 130%–truly a ‘bubble event’. That collapse, commencing in June 2015, continues despite efforts to stabilize it. Chinese bankers then injected directly $400 billion to stem the decline. Including other government and private sources, estimates are that no less than $1.3 trillion was committed to prop up stock values. So far it has produced little success, with more than $4 trillion in equity values having been wiped out in less than four months.

Another $500 billion in foreign currency reserves were committed by China to prop up the currency, the Yuan, which has declined in tandem with its stock markets. To finance its efforts to support its currency, China then began to sell its large pile of US Treasury bonds. Nevertheless, capital continues in 2015 to flee China in large volumes in the wake of the stock contraction, expectations of more currency disinflation, an initial devaluation by China of the Yuan, and a general expectation of more of the same.

Both China stocks and foreign exchange effects spilled over to other equity and currency markets throughout Asia, and as well to stock markets in the US, Europe and EMEs. In the case of the US and Europe markets, the contagion effect has not been that severe. Estimated around $150 billion, other counter-vailing forces also exist in US-Europe-Japan—i.e. potential more QE and suspension of US interest rate hikes—that have offset the initial China contagion effects. Not so, however, in the EMEs where financial assets in stocks and currencies followed the China trajectory more closely.

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