Volatility the watchword for financial markets in 2016

CHINA'S stock market could well have set the tone for what may be the defining theme for financial markets in 2016 - at least in emerging economies: volatility.

The year began on an ominous note. On Monday, the Shanghai Composite Index sank by almost 7 per cent, after setting off circuit breakers and a suspension in trading. The yuan weakened, hitting a new five-year low. Other equity markets in Asian and other emerging economies - including those as far afield as Africa and Latin America - also slumped, as did the US and European markets.

The trigger for the market crash in China was said to be continued weakness in its manufacturing sector, which according to official data, declined for the fifth month in a row in December. China's central bank, the People's Bank of China, projects economic growth for 2016 at 6.8 per cent, the lowest in 25 years, but most private sector forecasts are even lower. Also worrying is the enormous leverage that has built up in China's economy, where overall debt exceeds 200 per cent of GDP - much of it on the books of local governments, which leaves little room for countercyclical spending, with the implication that China's slowdown may be prolonged.