Major emerging markets, led by China, are increasingly likely to spread fear to financial markets in the U.S. and other developed countries, the International Monetary Fund warned Monday.
Equity-market spillovers to advanced economies coming from leading emerging markets have risen 28% since the 2008 financial crisis, according to the IMF’s calculations. The movements of all nations’ equity markets in 2015 were 80% attributable to markets in other countries, compared with a 50% linkage in 1995.
“As China’s role in the global financial system grows, economic and policy developments in that country will have increasing implications for global financial stability,” the IMF said in a report on global market stability. “China’s spillovers to global financial markets will likely increase considerably in the next few years.”
China’s financial system has relatively small direct linkages to economies such as the U.S., compared with the banking and financial ties of other big economies such as Japan’s. Meanwhile, exports makes up a relatively small part of the American economy, so worries about China’s economic health shouldn’t sink the outlook for most U.S. companies.
Still, market contagion between developed and emerging markets appears to be growing. Sometimes, there is a fundamental connection, such as when commodity producers’ stocks decline on days when China’s industrial giants swoon, the report said.
Many investors remember trading days such as Jan. 7, when the Shanghai Composite Index plunged 7%, triggering declines in equity indexes in the U.S., Japan, Australia and South Korea. In January, the Dow industrials had their worst month since August, another month soured by China concerns.
The IMF identifies stronger trade linkages and “increased market integration” as global trends contributing to equity-market spillovers, particularly those between emerging and developed economics.
But that doesn’t explain all of the contagion, some of which comes from the day-to-day decisions of millions of individual investors. “The increase in spillovers in the post-crisis period cannot be fully explained by the variables included,” the IMF said.
Write to William Mauldin at [email protected]