Investor confidence in China has declined due to the ongoing trade tensions between the United States and China, Director of IMF’s Monetary and Capital Markets Department, Tobias Adrian, said on Wednesday, October 10.
Trade tensions driven by tit-for-tat tariffs by the duo were one of the key issues highlighted during IMF’s launching of the fall 2018 Global Financial Stability Report yesterday. As explained, the most likely impact of the brewing tensions is on the investor confidence.
“What we have seen already in China is that financial conditions have tightened significantly this year, and the trade tensions are one of the factors that have led to this decline in investor confidence in China. Of course, the Chinese authorities have started to undertake expansionary monetary and fiscal policies in order to offset this shock to confidence,” Adrian pointed out.
He added that certain companies particularly exposed to trade – Chinese companies relying on exports to the U.S. or U.S. companies that are relying on exports to China – have underperformed relative to the broader market in the U.S. or respectively in China.
“But broadly in the U.S., financial conditions do remain easy, and the danger is that at some point those trade tensions are going to adversely impact investor confidence, hence global financial conditions. And we know from economic analysis that those confidence shocks can have significant adverse consequences for macroeconomic activity,” Adrian further stressed.
The latest byproduct of the trade war is that China has frozen its crude oil imports from the U.S.
Even though crude oil was left out from the recent wave of tariffs between, the country’s seaborne exports of crude oil to China dropped to zero in August, BIMCO’s data shows.
In 2017, Chinese imports accounted to 23% of total US crude oil exports. In 2018, that number was 22% during the first seven months.
Furthermore, the dry bulk market is also feeling the impact, with U.S. exports of soya beans decliningsignificantly.
The IMF report finds that the global economic expansion remains strong, supported by easy monetary policy.
“However, financial imbalances continue to build up, and the new financial system remains untested. Short-term risks to financial stability have increased, and risks in the medium term remain elevated. So, while there are reasons for optimism, this is no time for complacency,” Adrian said.
“Since our last report six months ago, the balance of risk in the economy has shifted to the downside. Global growth has plateaued. Trade tensions have escalated. Some emerging markets have experienced capital outflows and asset price pressures.”