IMF: Speculation Over China Set to Increase

It's hard to forget the January 2016 drop in the Shanghai Composite Index that caused declines in international equity indexes.

Photo: Bloomberg

The International Monetary Fund expects that worries over China will increase speculation over its economy as market dependence between emerging and developed countries increases.

Compared to the 50 percent linkage in 1995, movement in the global equity markets in 2015 was 80 percent, which shows an increased correlation between markets.

Following the crisis in 2008, the world markets from market spillovers to avant-garde economies has grown by 28 percent, as stated in the IMF report.

It was also indicated that China’s influence in the world financial system will continue to increase alongside the country’s economic and policy developments over global market stability. Forecasts also state that spillovers from China will increase dramatically over the next few years.

Overall, Chinese exports to the United States represent a minor part of the latter’s economy, in other words, speculations over China’s economic health should not reflect so much on companies based in the world’s strongest economy.

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The Chinese financial system, on the other hand, has direct links to the Japanese economy and any problems can be clearly sensed in the land of the rising sun.

While the current impact may be small for the American economy, the rate of growth of market contagion between matured and emerging markets appears to increase. According to the IMF report, the main reason is the fundamental connection, for example, stocks of commodity producers declining when Chinese industrial giants start losing.

It is hard to forget the 7th of January 2016, when the sudden, unexpected 7 percent drop in the Shanghai Composite Index caused declines in equity indexes around the world, including the United States, Japan, and Australia. The same month was the worst since August for the Dow Jones Industrial average, yet again caused by concerns over China.

The IMF has indicated a stronger link and elevated market integration due to global trends contributing to spillovers in equity markets usually between emerging and advanced economies.

The IMF also stated that all analysed data could not explain the contagion, part of it resulting in the day-to-day decisions of millions of investors.

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