Saturday 1 October 2016

IMF warns that China will set off more markets volatility

David Lawder

Published 05/04/2016 | 02:30

China’s financial influence brings global concerns, says IMF. Photo: Bloomberg
China’s financial influence brings global concerns, says IMF. Photo: Bloomberg

Global market spillovers from China's economic shocks will only 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 (IMF) said yesterday.

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Global market spillovers from China's economic shocks will only 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 (IMF) said yesterday.

Global markets have been badly shaken twice in the past year by stock market falls in China last summer and in the first weeks of 2016.

In both cases, fears of slowdowns in China's economic growth and industrial output reverberated through the global financial markets, causing prices of equities and commodities like oil to plunge in both emerging markets and advanced economies.

Investors can expect more of the same, the IMF said.

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

In a point aimed at Chinese officials, whose response to falling markets has been at time ham-fisted, the IMF said markets have become extremely sensitive to the economic signals coming from China and that 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 strategies consistent with achieving them will be increasingly important to avoid volatile market reactions with wider reverberations," the report said.

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

Shock impacts from China turned statistically significant shortly after the 2007-2009 financial crisis, the IMF noted in the statement.

Growth surprises from other major market economies did not share the significant nature of China's impact on global equity prices.

"Beyond the continued growth in importance of the Chinese economy, the size of financial market spillovers is also likely to grow because of the transition to a more market-based financial system and a decline in market segmentation," the IMF said.

In the meantime, financial markets will be more sensitive to changes in China's economic policies. (Reuters)

Irish Independent

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