IMF Chief Economist: Markets Overreacting to Oil, China

Global financial markets seem to be overreacting to falling oil prices and the risk of a sharp downturn in China’s economy, the chief economist of the International Monetary Fund said on Tuesday.

“It’s not a stretch to suggest that (markets) may be reacting very strongly to rather small bits of evidence in an environment of volatility and risk aversion,” Maurice Obstfeld commented at a news conference.

Speaking after the IMF cut its global growth forecasts for the third time in less than a year, Obstfeld also said that it is crucial that China makes its overall economic strategy and currency strategy, clear.

“Clear communication of an overall policy strategy including with respect to the yuan’s exchange rate is critical both for domestic stability and stability abroad,” Obstfeld said. Obstfeld said China faced further risks, although recent data from the world’s No.2 economy has been in line with the IMF’s expectations. But the IMF’s outlook will ultimately depend on how well China’s government manages the rebalancing of its economy.

Despite recent gloomy discussions in the media, Obstfeld put a slightly different spin on the slump in oil prices: “The oil price puts stresses on oil exporters… but there is a silver lining for consumers worldwide, so it’s not an unmitigated negative.”

Oil prices slipped to their lowest level since 2003 earlier on Tuesday, while data for 2015 showed that China’s economy grew at its weakest pace in a quarter of a century.