Obstfeld said financial markets have overly emphasised short-term movements in China's currency, adding that the yuan has often quickly recovered from periods of volatility in recent years. "Several of the downside risks highlighted in the April 2018 World Economic Outlook (WEO) ... have become more pronounced or have partially materialized".
The IMF issues the report ahead of the Annual IMF and World Bank meetings where world leaders, finance ministers and nongovernmental organizations will gather this week in Bali, Indonesia.
If the tradewar continues, it could take a significant bite out of global growth, according to the fund. Dow futures lost 0.5 per cent and the S&P 500 futures were down 0.6 per cent.
The Nikkei closed down 1.32 per cent this morning at 23,469.39.
The IMF's cut to its outlook was broad-based.
The IMF forecasts US GDP growth this year of 2.9 per cent, slowing to 2.5 per cent in 2019 - which is 0.2 points slower than the July estimate - and to 1.8 per cent in 2020.
Both of those figures would mark the slowest rate of expansion for China since 1990, when growth shuddered in the aftermath of the violent suppression of massive Tiananmen Square pro-democracy demonstrations the previous year.
The report applied a stress to the USA public sector assets, heavily concentrated in public pension funds, mortgages and student loans, finding that a scenario involving a severe recession, higher long-term interest rates and rapid falls in stock and real estate prices would shrink US public net worth by an equivalent of 26 percent of GDP by 2020.
The IMF chief economist said that while government officials have been moving to rein in China's credit expansion, it was understandable they would take steps to boost growth in the face of trade tensions with the United States, and these have impacted short-term economic growth, affecting the yuan.
The fund cut its 2019 United States growth forecast from 2.7 per cent to 2.5 per cent, and the China growth forecast from 6.4 per cent to 6.2 per cent. For FY20, the Chinese economic growth rate was cut by 0.2 percentage points to 6.2 per cent. Overall, global growth will remain steady - about 3.7 percent this year - and exceed that of 2012-2016.
It said global debt levels were higher than in 2008, meaning that if one big bank were to fail, the way Lehman Brothers did 10 years ago, the ensuing market panic could be more severe than before.
He said that the government should try its best to deal with the IMF's demand to further increase the price of gas and electricity and tighten the monetary policy as it would hurt the masses and the economy.
Experts believe the International Monetary Fund program will come up with harsh conditions that will largely impair the country's growth.
China was set to grow by 6.2 in 2019, down from the 6.4 percent projected last July.
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