Economic surprises in China are increasingly driving global stock-market returns, underscoring the need for clear and timely communication by the nation’s Communist Party policy makers, according to the International Monetary Fund.

There’s been a strong and steady increase over the last two decades in the impact of Chinese growth surprises on stock returns in emerging and advanced economies, the IMF found after analyzing the effect of Chinese industrial-production figures that missed market expectations.

It’s a trend that’s likely to intensify, according to the Washington-based fund. That means China’s roiling of global financial markets may become a more regular occurrence following unexpected devaluations of the yuan and data showing a slowing economy that also sent stocks tumbling around the world.

“The challenge of engineering a smooth transition will make global financial markets more sensitive to changes in China’s economic and financial conditions and policies,” the IMF said in a chapter released Monday from the fund’s semi-annual Global Financial Stability Report. The rest of the report, including the main findings about the world financial system, will be released next week.

“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,” the fund said.

The IMF found that advanced economies’ stock and currency markets are becoming increasingly sensitive to spillovers from emerging markets. More than one-third of the variation in returns in the stock and foreign-exchange markets can now be traced to emerging-market spillovers, the fund said.

Spillover Effects

Bond markets don’t have the same spillover effects, because fixed-income flows “are driven much more strongly by global factors,” according to the IMF.

The impact of financial connections between countries on spillovers has grown relative to that of trade links between nations, the IMF said. As a result, the degree of financial integration between countries can be a better indication of spillover risks than the size of a country’s economy.

While shocks about China’s economic fundamentals can rattle markets, spillover risks from the country’s stock market remain modest, the IMF noted. Spillovers from the more globally integrated equity markets in Brazil, Chile, Mexico, Poland and South Africa tend to be greater than in China and India, the IMF found.

The IMF said the research shows that policy makers may need to increasingly consider developments in emerging markets. There’s a growing risk of financial “spillbacks” from advanced economies’ policy actions, it said.

Source:
courtesy of BLOOMBERG

by Andrew Mayeda

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