IMF says China has capacity to manage economic slowdown

Lima, October 5

China has the capacity to manage its economic slowdown but needs to communicate policy more effectively and guard against potential spillovers, the International Monetary Fund (IMF) said today.

In a report, the IMF — whose annual meeting starts this week in Peru — said that it viewed China’s currency exchange rate to be in line with ‘medium term’ fundamentals after what it said was a depreciation of around three per cent in the yuan in August.

The depreciation came after China surprised global markets by devaluing yuan by nearly two per cent on August 11, and sparking fears of global currency war.

The IMF said China needed to expand market forces to return to sustainable growth and to implement effective governance.

“This will require, in particular, hardened budget constraints for both state-owned and private firms, and continued strengthening of the financial supervision framework,” it said.

The IMF calculates that every percentage point slowdown in China’s growth translates into a 0.3 per cent decline for other Asian countries, although it noted that the impact of China’s slowdown had likely been exacerbated by declines in its financial markets in recent months.

A summer rout in Chinese stocks and the unexpected devaluation of the yuan, also known as the renminbi, rattled global financial markets and raised concerns about Beijing’s policy-making and its ability to steer its economy through a rough patch.

“Spillovers have been magnified by forces that extend beyond China’s border — including falling commodity prices and the prospect of an increase in US interest rates — which could produce downward pressure on Asian neighbours,” the report said.

China is looking at plans to curb currency speculation as it seeks to quicken the process of making the yuan trade freely, a deputy central bank governor said last week.

Beijing will further open up its capital markets and develop its foreign exchange market as it aims to ‘accelerate the renminbi convertibility on the capital account’, Yi Gang wrote in an article published in China Finance magazine, a central bank publication.