Global shockwaves from China are only going to get worse, IMF warns

WASHINGTON – Global market spillovers from China’s economic shocks is only going to increase in coming years as the country’s financial influence grows and the yuan’s use as a funding currency broadens, the International Monetary Fund said on Monday.

In a portion of their latest Global Financial Stability Report, the IMF said developments in emerging markets now account for one-third to 40 percent from the variation between stock exchange returns and exchange rate fluctuations worldwide.

Slowdowns in China’s economic growth and industrial output reverberated through global markets this past year, causing prices of equities and commodities to plunge both in emerging markets and advanced economies.

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The IMF said markets have grown to be extremely responsive to the economic signals originating from China which policymakers there must not send mixed messages.

“As China’s role in the global financial system grows, clear and timely communication of its policy decisions, transparency about its policy goals, and techniques consistent with achieving them will be increasingly vital that you avoid volatile market reactions with wider reverberations,” the IMF said in areas of the report released on Monday.

Markets will be increasingly affected by the sheer size China’s economy, more financial linkages, such as the report on Chinese companies on international stock markets and the growth of the yuan’s use in international transactions.

The IMF said modeling of equity returns in 13 other emerging markets and 25 advanced economies discovered that shock impacts from China turned statistically significant shortly after the 2007-2009 financial crisis. Growth surprises from other major market economies did not share the functional nature of China’s impact on global equity prices.

“Beyond the continued growth in importance of the Chinese economy, how big financial market spillovers can also be likely to grow because of the transition to some more market-based economic climate and a decline in market segmentation,” the IMF said.

“Moreover, the challenge of engineering a smooth transition will make global markets more responsive to changes in China’s economic and financial conditions and policies.”
? Thomson Reuters 2016