(Bloomberg) -- China could be hit by a change in market sentiment in the event of an all-out trade war with the U.S. even if the direct impact on the economy isn’t that large, according to former central bank governor Zhou Xiaochuan.
Zhou, who retired just this year, said the U.S. tariffs on China -- when looked at in light of the size of the economy -- are “not very significant.” Nevertheless, the pass-through to confidence is a potential channel for disruption.
“People may become nervous,” he said in a Bloomberg Television interview with Francine Lacqua. “Nobody really knows. Suddenly there is a trade war. They may change their mind in terms of stock market investment.”
“This kind of behavior is much bigger than the real impact” on the economy, he said in the interview at the Ambrosetti Forum in Cernobbio, Italy.
China is already grappling with a policy-induced economic slowdown that’s collided with uncertainties over the impact of a trade war. That’s prompted leaders to ease their campaign to curb debt as they seek insurance against the risk of a future economic downdraft.
‘Minsky Moment’
Zhou previously warned in October that China should defend against the risk of a “Minsky moment,” or a sudden collapse of asset values. The concept is named for Hyman Minsky, an economist who argued that long bull markets can lead to major collapses. China’s currency has weakened more than 6 percent since mid-June, the worst performer in Asia, while stocks have entered a bear market.
Zhou said on Friday that close vigilance is needed and China’s “number one” priority must be avoiding an asset bubble. “We should keep the currency floating with the market demand and supply relationship to avoid any kind of distortion,” he added.
Zhou said that globally, there needs to be stronger supervision of financial assets and he also highlighted the risks from global monetary authorities keeping policy loose for so long after the financial crisis.
“It should be a relatively short-term measure,” he said. “If it lasts too long, it’s also dangerous.”
(Updates with additional comments in seventh paragraph.)