Will the Fed be mauled by China?

The mini-crash in China that kicked off the new year may be a significant event — not only in China, but around the world. And, it's not just for the very obvious reason of contagion risk on the rise.

First, the recent bull market in Chinese shares was much more of a bear-market bounce, in my view.

Shanghai shares had plunged almost 50 percent from their 2015 highs to their late summer lows and then rebounded 20 percent. Analysts were quick to use the technical definition of a bull market — a 20-percent jump in stock prices — to justify the notion that the bull was back in the China shop.

In reality, such a short-covering, government-sponsored rally was really a trap. China's economy, particularly its manufacturing sector, as evidenced by weekend data, continues to contract. The expiration of prohibitions on large-scale stock sales is coming up shortly, which will add further pressure to a newly depressed market.

And China's currency continues to slip … a stealth devaluation that is putting pressure on other emerging markets, which have already suffered greatly in 2015.

The implications of a continued negative feedback loop within China have global consequences, as we have seen from the market action around the world.

Germany, which is quite dependent on China as a destination for its exports, is having a dismal day for the Dax, down about 4 percent today alone. More broadly, European markets are down between 2 percent and 4 percent, at a time when European inflation remains well below desired levels.

Were it not for the escalating tensions between Saudi Arabia and Iran, oil prices would likely be plummeting today, rather than rising.

China's weakness also has implications for U.S. export and corporate-profit growth, and, of course, Federal Reserve policy.

A weekend gathering of Fed policy makers seemed to indicate that they remain content to continue normalizing policy. However, if the early months of 2016 bring market disruptions of this magnitude like we saw in China on Monday — with Shanghai stocks tumbling 7 percent before triggering circuit breakers and Shenzen stocks falling 8 percent — policy makers simply must take note.

In September, the Fed delayed an expected rate hike due to unexpected turbulence in world markets, especially in China, following a series of declines that were similar to the one experienced on Monday.

Emerging markets followed suit, as have developed markets. Pressure from China could lead to further weakening of emerging-market currencies and capital flight from Beijing to Bangkok to Brazil. In turn, a subsequent strengthening of the dollar and yen could lead to further deflationary consequences in the U.S. and Japan, an unwelcome development, at best.

While the fourth year of a U.S. presidential cycle is typically positive, there are reasons to be cautious, beginning first with the myriad negative developments from outside the States.

China's weakness is chief among them, followed by rising geopolitical risk, a less friendly Fed (until proven otherwise), political risk in a rather uncertain presidential race, and the risk of regulatory and tax law changes that could prove unfavorable to a continued bull market here at home.

But China, in many ways, looms largest. While its consumer economy is growing, China's manufacturing sector had, up until recently, produced a "super cycle" in commodities, the death of which has adversely affected everything from copper to crude oil.

China is deflating. Its shadow banking system is at risk, thanks to vast overcapacity in manufacturing and housing that could lead to a wave of corporate calamities that may dwarf the meltdown suffered in the U.S. eight years ago.

These are big risks. And these are dangerous times. It would behoove the Federal Reserve to reserve judgment on having attained its goals of maximum, sustainable, employment and price stability until that assessment can be made of the rest of the world, as well.

Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. Follow him on Twitter @rinsana.