China Voice: Don't underestimate effects of Fed's expected rate rise

To raise or not to raise? That is a question for the U.S. Federal Reserve to ponder, but the uncertainty over a potential increase in interest rates has had negative spillover effects in the market.

The U.S. unemployment rate in August dropped to a seven-year low of 5.1 percent and is now in the middle of the range that Fed officials consider full employment, raising expectations of an interest rate hike.

U.S. stocks suffered heavy losses Friday as investors tried to digest the closely watched August jobs data amid a global sell-off. Financial markets have experienced a storm over the past few weeks, with stocks, commodities and emerging market currencies selling off sharply.

The recent turmoil has been caused by anxiety about an anticipated U.S. interest rate rise and a weak world economic recovery.

Financial and monetary volatility could already be seen in some emerging markets before China rolled out new foreign exchange rate regulations, which may have helped trigger but did not cause recent global market fluctuations.

Since the 2008 global financial crisis, many developed countries have pumped a great deal of liquidity into the market and lowered interest rates to nearly zero.

Hot money flowed to emerging markets for higher returns. However, as the U.S. economy has recovered, the expectation of an interest rate rise has prompted hefty capital outflows from emerging economies since mid-2014.

Disruptive asset price shifts and financial market turmoil could lead to capital flow reversals in emerging economies and remain a risk to emerging markets, according to a note from the IMF for the upcoming G20 Finance Ministers and Central Bank Governors' meetings.

Historical evidence shows that almost all major financial crises since 1980 occurred when the Fed tightened monetary policy.

Given the U.S. dollar's role as a universal currency, the Fed's move will have a wide spillover effect, influencing global commodities, exchange rates and stock markets.

The uncertainty over the interest rate rise might continue to haunt emerging markets, whose currencies are under huge depreciation pressure and whose foreign exchange reserves are falling sharply. Drastic changes in the value of major currencies will make the financial market even more turbulent.

For the sake of global economic stability, the pace and scale of a possible rate rise should be treated with due caution. Endi