In January, the markets panicked about a hard landing in China, accompanied by fears of a sudden devaluation of the renminbi that could spread deflationary pressure throughout the rest of the world. In the event none of that happened, and the markets rallied sharply. Why did China-related risks suddenly dissipate, and might they return?

One reason why the risks abated had little to do with China itself, and everything to do with the Federal Reserve. In the midst of the global market melt-down in February, key members of the FOMC, led by Bill Dudley, realised that financial conditions in the US were excessively tight as a result of the rising dollar, and they suddenly adopted a far more dovish tone.

Many people think that an international “meeting of minds” occurred at the Shanghai G20 conference in late February. As a result, the Federal Reserve delayed its rate increases, the Bank of Japan and the ECB desisted from “devaluationist” monetary policies, and China set its face against a sudden devaluation of the renminbi. All this eased global financial conditions and, in a period of dollar weakness, calmed the currency markets.