The biggest risk is actually China devaluing the yuan. They are reporting their forex reserves on Sunday. If the yuan gets devalued this year this means China starts to export deflation. One or 10 stocks losing 50% in value is not a big deal. The Fed needing to cut rates in the face of slowing growth would be an issue.
Both energy and China are the big risks. It'll be interesting to see how much of their foreign reserves were used up in January.
To some extent, it is easier for the Chinese to defend the on-shore yuan market (CNY) through capital controls. It is harder to defend in the off-shore yuan market (CNH). Great discussion from a few days ago here: https://news.ycombinator.com/item?id=11008872
I personally have tremendous admiration and respect for managers of the Chinese economy and I think betting against the Chinese government is just a money-losing, dumb idea.
IMHO, the big threat continues to be oil. Cheap dollar funding has pumped up global supply to well past demand. This is crushing the economies of oil-exporting nations through currency devaluation. Ruble, CAD$, Nigerian Naira, Krone, Bolivar, etc. have gotten crushed.
Developed Market banks and investors have poured a lot of money in emerging markets in the past decade. Some of that investment is going to be lost.
It is an open question whether we are working up to an event that is similar to the 1997 Asian financial crisis, 1998 Russian default, the 2012 European debt crisis, the 2008 Global financial crisis, or something milder, or something much worse.
This is going to be the most interesting question. China worked pretty hard to get the Yuan in the reserve currency basket, and they worked even harder to reassure the world after they pulled the devaluing stunt in August. From the WP article: "But the Chinese central bank argued on Tuesday that its goals were more mundane than spurring exports and growth. Rather, the bank said that the change was a one-time event to allow it to set exchange rates in line with free market practices. And in their initial responses, many analysts agreed."
If they do it again then they lose all credibility with the rest of the world. And how the world responded would change China's trajectory.
Ironically getting that reserve currency status could be biting them in the ass in the short term. You need to have fairly free currency flows as part of the deal. Which means its tricky for them to impose capital controls now.
Every made in China product I've bought has been cheaper and/or much more capable than the one it replaces. Haven't they been exporting deflation this whole time?
