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Whither China? The IMF Crowd Wants to Know

The risk of a sharper slowdown in the Chinese economy and renewed currency instability dominate concerns at global gathering.

Move over, Janet Yellen, the world has something else to fret about — China.

Worries about the growth slowdown in China took precedence over concerns about monetary policy tightening by the Federal Reserve at the annual meetings of the International Monetary Fund and the World Bank, which concluded in Lima on Sunday.

Concerns about the health of China’s economy and the rise of debt have been building for some time, but the sharp drop in the Shanghai and Shenzhen stock exchanges this summer and a sudden depreciation of the renminbi in August caused turmoil in global financial markets. The recent experience represents a stark departure from the 2008–’09 global financial crisis and the 1997–’98 Asian financial crisis, when China served as a pillar of stability.

“This is the first time China has been at the epicenter of a global economic shock,” said Paul Sheard, chief global economist at Standard & Poor’s Ratings Services.

Bambang Brodjonegoro, Indonesia’s Finance minister, was asked which factor — Fed tightening, weak commodity prices or slower growth in China — posed the biggest threat to his country’s economy. “If we have to compare among these three, I would put China No. 1,” he told a gathering of financiers hosted by the Institute of International Finance on the sidelines of the IMF meetings. “First of all, China is our major trading partner. The influence of China in Southeast Asia has been quite dominant.”

“It’s China, and not U.S. monetary policy, that is the dominant source of shock for emerging markets,” because of the country’s falling imports and reduced appetite for commodities, David Lubin, head of emerging-markets economics at Citigroup, told the same gathering.

To be sure, not everyone was bearish on China. Christine Lagarde, the IMF managing director, said the Chinese economy was decelerating as part of a deliberate shift from an export-oriented model to one driven more by domestic consumer demand. The slowdown was “predicted, expected, anticipated, and we believe it’s a good move,” she said at a news conference. “There will be little bumps on the road,” she added, “and we all need to get used to these little bumps on the road in that transition process.”

The Fund maintained its forecast for Chinese growth unchanged at 6.8 percent this year and at 6.3 percent for 2016 — a soft landing, not a hard one. At the current growth rate, China is adding as much to global output, thanks to the economy’s larger size, as it did in 2008 when its growth exceeded 10 percent, Sheard noted.

Gary Cohn, president and COO of Goldman Sachs Group, said Chinese authorities were “doing what they told us they were going to do” with the economic transition. Although Beijing’s crackdown on official corruption has acted as a brake on economic activity recently, “long term, it’s exactly where you want a country to be,” he added.

Yi Gang, the deputy governor of the People’s Bank of China, sought to reassure participants in his address to the IMF meeting. He said the Chinese economy had entered a “new normal” of slower but higher-quality growth. He also claimed that the stock market correction “has largely run its course,” and suggested much the same about the exchange rate, saying, “persistent RMB depreciation would be inconsistent with China’s economic fundamentals.”

Yet worries persist because of the complexity of the Chinese transition, conflicting policy objectives and the opacity of Beijing’s policymaking process.

“Concerns about China will simply not go away,” said David Fernandez, head of fixed income, currencies and commodities research, Asia-Pacific, at Barclays. The recent market volatility revealed a strong desire by Chinese investors and business to diversify their holdings and move capital out of China. The authorities can continue to open Chinese markets up to freer flows of capital or seek to promote currency stability — but not do both at the same time, several analysts said. Fernandez predicted that Chinese growth would slow to 6 percent next year and the renminbi would weaken in coming months, especially if Fed tightening boosts the dollar.

That prospect worries Joachim Fels, global economic adviser at Pacific Investment Management Co. “If China should really go for the big devaluation and start to export its own deflation to the rest of the world, then I think the lights go out for the global economy, at least for a while,” he said.

Whether they were bullish or bearish on the Chinese outlook, participants agreed that policymakers in Beijing need to explain their actions and provide clearer signals of their intentions, both to foreign partners and financial markets. Such clarity will be particularly important now that China is preparing to take over the presidency of the Group of 20 nations next year.

“Chinese authorities will have to get really good at giving forward guidance, just like the rest of the world,” said Joyce Chang, global head of research at J.P. Morgan.

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