China could once again “spook” global financial markets this year, the IMF’s chief economist warned.
Global spillovers from China’s slowdown have been “much larger than we could have anticipated,” affecting the global economy through reduced imports and weaker demand for commodities, IMF economic counselor Maurice Obstfeld said in an interview posted on the fund’s Web site.
After a year in which China’s efforts to contain a stock market plunge and make its exchange rate more market-based roiled markets, the health of the world’s second-biggest economy is again to be a key issue to watch this year, Obstfeld said.
“Growth below the authorities’ official targets could again spook global financial markets,” he said, as global equities on Monday got off to a rough start to the year. “Serious challenges to restructuring remain in terms of state-owned enterprise balance-sheet weaknesses, the financial markets and the general flexibility and rationality of resource allocation.”
Obstfeld, who took over as chief economist at the IMF in September last year, said emerging markets are also to be “center stage” this year. Currency depreciation has “proved so far to be an extremely useful buffer for a range of economic shocks,” he said.
“Sharp further falls in commodity prices, including energy, however, would lead to even more problems for exporters, including sharper currency depreciations that potentially trigger still-hidden balance sheet vulnerabilities or spark inflation,” he said.
With emerging market risks rising, it will be critical for the US Federal Reserve to manage interest rate increases after lifting its benchmark rate last month for the first time since 2006, Obstfeld said.
Fears escalated on Monday that the global economy could struggle more than expected this year — a prospect that contributed to a plunge in financial markets.
The anxiety was heightened by reports that manufacturers extended their slumps last month in the US and China, the world’s two largest economies. Factory activity contracted for a second straight month in the US and for a 10th straight month in China.
The manufacturing data made clear that the troubles that weighed on US factories last year have yet to ease. Sluggish economies in major markets — from China to Europe to Japan — have depressed US exports.
That trend has been worsened by a strong US dollar, which has made US goods more expensive for its trade partners.
Not all the news was bad. A cheaper euro has helped European manufacturing, which expanded at the fastest pace in 20 months last month, according to data firm Markit.
Still, China’s persistent sluggishness might be causing broader damage than previously thought, analysts say. China’s government is trying to shift its economy toward domestic consumption and away from a reliance on exports and investment in roads, factories and real estate.
However, that transformation has proven difficult: China’s growth in the July-September quarter last year fell to 6.9 percent from a year earlier, the slowest pace in six years.
China’s deceleration has been hugely disruptive for countries that have long exported commodities such as oil, copper and other metals to the Chinese market.
For example, China consumes about 60 percent of the world’s iron ore, which is used to make steel.
China’s declining appetite for such commodities has slowed growth in Australia, Brazil and Malaysia, among other economies.
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