Andrew Karolyi, professor of finance at the Samuel Curtis Johnson Graduate School of Management at Cornell University and author of newly released book, Cracking the Emerging Markets Enigma, says China’s market volatility will ebb in the short term, but an inevitable Fed rate hike will pressure emerging-market stocks, which, in turn, could lead to another round of market dislocation in developed economies.
“The excessive stock-price volatility in China reflects a market that is insufficiently deep and inadequately broad in terms of participation to support a large economy that desperately seeks a sustainable growth path.
“This excessive volatility will continue to ebb and flow in the near future and will continue unless the People’s Bank of China and Chinese securities and banking regulatory commissions dedicate themselves long-term to major corporate governance reforms toward market transparency and to major reforms to open up the market to global investors.
“This volatility will ebb and so will the spillover activity in the near term. But the next sign post in the road will be the inevitable interest rate hike to be initiated by the Federal Reserve’s Open Market Committee. When – not if – that rate hike happens and very likely before the end of the year, that event will be associated with even greater pressure on emerging market stocks, bonds and currencies as global fund flows recede from them. Those pressures, in turn, could very well lead to another round of market dislocation in developed economies’ markets.”