Root of investor anxiety: Uncertainty about China, Fed

Fears about China’s slowdown and a coming U.S. interest rate hike have sent global stock markets into a fidgety freefall.

But why? China’s economy has been slowing for years. And the Federal Reserve has long been expected to raise short-term interest rates from near zero, where it’s kept them since 2008. So what’s sowing panic now?

In a word: Uncertainty.

Investors have grown used to near-zero rates and a booming Chinese economy – the world’s second-largest after the United States. No one knows how the global economy will manage without them.

Many investors aren’t waiting to find out. They’ve been dumping stocks with a vengeance. When investors feel unsure about the future, many tend to panic.

The iShares MSCI Emerging Markets index has lost nearly 16 percent of its value since mid-July. In the United States, the Dow Jones industrial average and the Standard & Poor’s 500 index have both sunk about 10 percent since July 20, even though both rose sharply on Wednesday.

The July-to-September quarter was the S&P’s worst since 2011.

“Concerns about China’s economy are heightening the level of angst among global investors who are already having to cope with multiple sources of uncertainty,” says Eswar Prasad, professor of global trade policy at Cornell University.

As it undergoes a painful shift away from an overreliance on exports and overinvestment in homes and factories, China’s economy has decelerated for four straight years. And it’s almost surely slowing again in 2015.

The International Monetary Fund forecasts that China’s economy will expand 6.8 percent this year. It would be its weakest growth since 1990. Many economists, skeptical of China’s official numbers, suggest that growth might even dip below 6 percent.

Beijing’s clumsy attempts to halt a drop in its own stock market and its confusing Aug. 11 decision to devalue its currency, the yuan, have escalated fears. The concern is that Chinese policymakers have panicked and that the economy might be in worse shape than previously thought.

“If China’s scared, suddenly the rest of the world is scared as well,” says Eric Lascelles, chief economist for RBC Global Asset Management. “China is the subject of the day. What is happening there, and how consequential is it for the rest of us? There are a lot of unknowns.”

Any economic news out of China is being scrutinized by anxious investors. Global stocks tumbled Monday after China reported that profits at industrial companies had plunged 8.8 percent in August from a year earlier. Investors are nervously awaiting a report Thursday on Chinese manufacturers.

Fed Chair Janet Yellen noted, in part, concerns about China’s economy in explaining the central bank’s Sept. 17 decision to delay its long-awaited first rate hike in nine years.

“Normally, when the Fed pushes rate hikes off, it’s catnip to the market,” Lascelles says.