Jitters over the health of the Chinese economy could trigger a bloodbath on financial markets if a hard landing materialises, the International Monetary Fund has warned.
The IMF said policy choices in the world’s second largest economy would also have “increasing implications for global financial stability” in the coming years as the country opens up its bond and equity markets.
The fund said emerging market economies such as China, India, Brazil and Russia had driven more than half of global growth over the past 15 years.
Stronger trade ties and financial linkages meant spillovers from these countries had become “the norm, not the exception”, increasing the risk that future shocks could send powerful reverberations around the globe.
The IMF calculated that emerging market spillovers now accounted for a third of the fluctuations seen in equity and currency markets in advanced nations.
“The impact of shocks to China’s fundamentals on global financial markets is expected to grow stronger and wider over time,” the Fund said in a pre-released chapter of its Financial Stability report.
“Clear and timely communication of its policy decisions, transparency about its policy goals, and strategies consistent with achieving them will, therefore, be essential to ensure against volatile market reactions, which may have broader repercussions.”
“Fire sales” of assets by money managers could also amplify emerging market spillovers in a downturn, if mutual funds rushed to sell illiquid assets, the IMF warned.
Life insurance warning
The Fund issued a separate warning on the $24 trillion life insurance sector. It said herding behaviour created systemic risks that could make firms “too many to fail”.
Full article: China jitters could trigger global market bloodbath, IMF warns (The Telegraph)