China’s gyrating stock markets are a reminder that movement matters. Volatility is increasing in the People’s Republic, and fighting it is a losing battle.
Prices of stocks have tumbled in recent days, but that alone isn’t frightening. Equity markets are just back to where they were a week ago; yields on triple-A and double-A five-year bonds are back to October’s level. But their tendency to jump around has increased. In the past week, stock-price volatility has jumped to levels last seen in 2009.
China has encouraged some kinds of swings. The yuan has been allowed to fluctuate with the aim of driving away speculators. Its implied volatility, based on one-month option prices, is at a three-year high. Other oscillations – like changes in house prices or banks’ tendency to massage their deposit balances up and down – have been suppressed. For the ruling Communist Party, political volatility is still to be avoided at all costs.
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