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The IMF Global Financial Stability Report for April 2018 said downside risks “remain large” as “easy financial conditions continue to fuel financial vulnerabilities, leaving the global economy exposed to the risk of a sharp tightening in financial conditions.”
There is a “risk of abrupt, adverse feedback loops in a period of asset price adjustments.” I think what they mean here is that a downward movement in prices generates more fear, which then feeds back to more downward moves, and so.
It also mentions a possible trigger: “increased trade tensions have led to investors’ jitters, and a wider escalation of protectionist measures could ultimately take a toll on the global economy and on global financial stability.”
Two bulls in a China shop
Make no mistake: the current trade war between China and the USA is not principally about unfair trade practices (even though the US and other advances have much to complain about in terms of forced handing over of technological knowhow, theft and subsidies). There is a much bigger picture. Within that bigger picture it is very difficult for either side to back down – the political price would be too high.
China and the USA are rival global leaders, particularly in the technology of the future. China is already ahead in many technologies, e.g. smartphone money, online shopping. A new era is dawning.
China has set the ambition to become the leader in a number of hi-tech areas under the “Made in China 2025” programme. It is pouring billions into things like I.T., robotics, aerospace, energy-saving vehicles, aviation, pharmaceuticals, artificial intelligence and bio-tech.
Silicon Valley and many other places have good reasons to be worried by the power behind this competition. China is no longer the land of cheap simple-tech products. It already invents and manufactures cutting-edge products.
With the current Communist party push it is likely to succeed in many more areas – get used to it.
One person who refuses to cede leadership is Donald Trump. He thinks he can strangle at birth a number of these Chinese initiatives/companies by (a) shutting off technological transfer, and (b) getting China’s political leaders to play by his rules through his wielding the big stick of tariffs.
He’s too late. The genie is already out of the bottle. Sure, the US can inflict pain on China (and itself) through these measures, but in the medium run China’s tech prowess is here to stay.
Just 18% of China’s exports go to the US. Only 4% of China’s GDP is in the form of exports to the US.
China can survive off the other 82% of export markets plus the domestic market, which is massive and getting bigger. It’s already as big as the US in purchasing power parity terms (what a they actually produce in terms of goods and services) even though it not as big in current exchange rate terms. That is not to say that a trade war will not impose many severe short term costs.
Dangers for financial markets
It is against this backdrop that we have to assess the US economic and financial environment and also assess the Chinese situation. We see increasing tension occurring when “many markets still have stretched valuations, and may experience bouts of volatility in the period ahead” (IMF).
Fear can be contagious from one asset market to another: “Asset price spillovers have important implications for the housing market.” (IMF)
And downward lurches in the house sector can feedback to others: “spillovers via the housing sector may play a prominent role in a future crisis.” (e.g. look at how many housing markets have been buoyed by Chinese money: Sidney, Vancouver and London to name three)
“Risks to medium term economic growth, stemming from easy financial conditions, remain well above historical norms.” (IMF)
With the unemployment rate at under 4% in the USA, “
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