There’s a new biggest risk to global markets

The newly-crowned biggest worry in global markets comes from a familiar source: China.

Investors now see the tightening of Chinese credit as the most pronounced “tail risk” they face, according to a Bank of America Merrill Lynch survey of 213 money managers with almost $650 billion under management.

Banking regulators have recently boosted efforts to keep risky lending behavior to a minimum amid worry that excessive credit may create problems further down the line. Meanwhile, the People’s Bank of China finds itself in an unenviable position, treading a fine line between hiking short-term interest rates to stem lending, while still trying to keep economic growth chugging along.

BofA Merrill Lynch

It’s a balancing act that requires a deft touch, one that has eluded the PBOC in the past. For evidence of that, look no further than the turmoil the central bank created in August 2015, when it devalued the country’s currency. It was a shocking and unexpected move that caught investors all around the world off-guard and spurred an 11% correction in US stocks.

Soon after, investors moved on to new worries: contracting earnings growth, Brexit and the US presidential election. But with those risks now relatively muted, China is back at the forefront.

Still, out of the survey-high 31% of respondents that see China presenting the biggest tail risk, just 22% of them think it will either cause global volatility or a worldwide economic slowdown.

The second-ranked tail risk for markets is a bond market crash, something BofAML Global Research chief investment strategist Michael Hartnett just doesn’t see in the cards with yields at current levels. Sitting at 2.36%, they’re still far from the 3.5% to 4% area deemed dangerous for markets, he wrote in a client note on Tuesday.

The May survey marks a big change from the April version, which saw investors most concerned with the disintegration of the European Union. Now that the French and Dutch elections have come and gone without major incident, those risks have subsided.

While China is the biggest source of trepidation for traders, overall worry in the stock market is at the lowest in more than three years. About 47% of those surveyed said they haven’t bought equity hedges to protect against a decline in the next three months. That’s the least since January 2014 and down 15 percentage points since last month.