2016 started with a bang as the Chinese markets crashed 7% before trading was suspended. You can find a good account of the opening day volatility in the markets in this blog post by Caroline Hyde, a correspondent for Bloomberg News.
The weak PMI data that came out just before the crash is just the straw that broke the camel's back. US tightening and anticipation of further rate hikes could be the prime mover here. China relies heavily on US consumption for manufacturing exports and the impact of the US rate hikes should have been felt in China much sooner. With further rate hikes slated in USA, there is no hope of a demand side stimulus.
On the question of interest rate increases in USA, it seems USA is not yet ready for more interest rate increases. The biggest loser on the rate hikes could be the US government, which could see a rise in bond yields as demand for low return assets would reduce corresponding to the higher cost of capital in borrowing from the Fed. However the market uncertainty from the rate hikes is so high that the risk adjusted return from government bonds is still attractive, as was evident in last rate hike, when the government bond yields actually reduced. Link to related Bloomberg story.
China is sitting on another time bomb right now which is the state and municipal debt. The state and local governments are under increasing pressure to raise revenues to sustain their high debt levels, and the weak PMI data maybe an indicator that this may not be an easy job. Link to related Bloomberg story.
