China’s spillovers that trigger financial asset price movement in global markets will grow with more tightened direct financial linkages among global economies and concerns about the country’s weaker growth and import demand, an official at the International Monetary Fund said Tuesday. 

“Spillovers of emerging market shocks to equity prices and exchange rates in advanced and emerging market economies have risen substantially and now explain over a third of the variation in asset returns in these countries,” Dong He, deputy director of Monetary and Capital Markets Department at IMF said during a seminar on “Global Financial Stability Report 2016,” released this month.





By analyzing emerging market countries, IMF found out that more integrated financial markets like Brazil, Chile, Mexico and Poland transmitted consistently larger equity market spillovers than larger emerging market economies, such as China and India, whose financial markets are more segmented.

But growth surprises from China had a “statistically significant” and “sizable” impact on the global market shortly after the 2007-2009 financial crisis.

“Unanticipated changes in China’s fundamentals ... say if the country’s monthly industrial production is below market expectations, it has an impact on global equity prices while Brazil’s impact is more significant at the regional level in Latin America,” he said.

He added that China’s direct financial linkages have also grown in the past few years, with cross-border bank exposures to China exceeding $1 trillion and Chinese issuers dominating Asia’s external dollar bond markets.

Financial linkages are expected to grow substantially in strength, and financial market spillovers can be expected to expand accordingly.

To avoid volatile market reactions to the shocks, IMF encourages Chinese authorities to pursue “clear and timely communication of policy decisions,” he said.

By Park Han-na(hnpark@heraldcorp.com)