(CBN - Global)March 30 -- A structural liquidity shortage is one of the biggest challenges facing global financial markets, Mr. Zhu Min, deputy managing director of the International Monetary Fund, told CBN in an exclusive interview on March 27.
Mr. Zhu spoke about how IMF studies have revealed a significant degree of volatility in global markets. The index that the IMF uses to measure volatility is determined by comparing the variation for a particular product on a single day with its average daily market fluctuation for the past 100 days. If this ratio is within a standard deviation, then the IMF considers the volatility as normal. If the ratio falls within two standard deviations, then the IMF regards the volatility as high.
In US stock markets last year, Mr. Zhu said the IMF observed volatility equivalent to five standard deviations, the highest since 1928. At the same time, the IMF recorded volatility equivalent to eight standard deviations in US bond markets, the highest since 1962. Volatility is closely related to a liquidity crunch in US financial markets and close linkages between global markets. Because of these tight links, when markets become volatile, liquidity tightens, leading to increased volatility.
On the issues that global financial markets should take note of, and those that may affect China this year, Mr. Zhu said that the first and foremost is deviations in the monetary policies of the Federal Reserve and the European Central Bank, as such differences will lead to changes in interest and exchange rates. In the event of a rate hike by the Fed, coupled with a stronger US dollar, the debt situation for companies in emerging markets will deteriorate and this will become a major problem.
Next is the growing impact that bulk commodities have on the global economy, as this affects corporate debts, and impacts the bond markets. In addition, structural liquidity shortage in the markets is now an issue that is worth particular attention.
Finally, geopolitics has gradually become one of the main factors that affect global financial markets. All these will affect China, and China itself is also going through an adjustment period as it deals with structural changes and financial reforms, as well as excessive corporate assets and liabilities. As both internal and external forces interact and intersect, 2016 will be a most challenging year for the global financial markets.