Precautions required to defuse financial risks

The three major United States stock indexes plunged on Monday, with all three indexes losing more than 7 percent by end of day. European stock markets, too, plunged across the board.

Stock prices usually fall sharply either because of a sudden war or terrorist attack, or because of a crisis in the market itself. However, the latest US stock market crash has not been caused by a war; nor did it start in the financial system.

This year's presidential election and the existing uncertainties have made it difficult for the US stock market to continue to rally. Medium-term downward pressures, the novel coronavirus outbreak, a globalized world and a drastic decline in oil prices have exacerbated market panic and volatility. And the spread of the coronavirus in Europe could prolong the damage to global supply chains.

US investors face the risk of a global recession, a challenge the US' monetary policy cannot address.

Economic data show the US' economic fundamentals remain strong and the decline in oil prices has yet to pose a significant threat. It is not clear where the stock market will go, but panic and risk aversion brought about by sustained uncertainty could cause the already fragile optimistic sentiment in the market to evaporate.

Although the White House announced that it would implement a series of tax cuts to stabilize the market, the move will not be enough to withstand a coming recession. China should continue to enhance its ability to prevent and defuse any systematic financial risk.

21ST CENTURY BUSINESS HERALD