The International Monetary Fund (IMF) issued its Global Financial Stability Report (GFSR) on Wednesday, warning that the continuous low interest rate may fuel more financial risks and intensify the vulnerability of the financial system.
At its annual autumn meeting in Washington D.C., IMF also recognized China’s efforts in increasing finance stability and suggested Chinese authorities to continue tightening financial regulations.
The report said that the pace of global economic activities remains weak.
Compared with the Global Financial Stability Report in April, the October report stressed the negative impact of trade tensions, forecast that global business confidence is expected to weaken further, and downside risks are intensifying.
The report said that continuous trade tensions and policy uncertainties are the main factors of downside risks. Major geopolitics incidents, such as no-deal Brexit, will further affect economic activity.
Downside risks to economic activities have been functioning in those trade tensions, said Tobias Adrian, financial counselor and director of the Monetary and Capital Markets Department, who also urged policy makers around the world to work continuously together in order to resolve those trade tensions.
The report also said that downside risks have made many central banks to adopt an easier stance on monetary policy, which helps support global growth in the short term, but also encourages investors to take more risks. As a result, vulnerabilities have continued to intensify.
Meanwhile, valuations appear stretched in some important markets, for example the overvalued stock markets in the United States and Japan, which brought financial stability risks.
Vulnerabilities may reveal themselves if tightening financial policy is carried out abruptly.
Facing the vulnerabilities, IMF urged policy makers around the world to take stricter supervisory and macro prudential measures.
While recognizing China’s efforts in enhancing finance stability, IMF suggested Chinese authorities to further tighten financial regulations.
In a number of areas, financial regulations have been tightening. And the authorities have made effort to leverage some parts of the financial system, including the shadow bank system, according to Adrian.