SWITZERLAND / DAVOS: Financial markets need more clarity on how the Chinese authorities are managing their currency, particularly the relationship of the yuan to the US dollar, IMF Managing Director Christine Lagarde said on Saturday.
Asked at a panel discussion in Davos whether she would back capital controls by China for a period, she avoided a direct reply but said, “Certainly a massive use of reserves would not be a particularly good idea, some of it was already used.”
She said that the market needed ‘clarity and certainty’ about China’s exchange rate basket “in particular with reference to the dollar, which has always been the reference.”
“That would be the right move to make,” she added.
“Capital controls would be an appropriate way for China to reconcile its need to keep domestic monetary policy loose while stabilising its currency,” said Bank of Japan Governor Haruhiko Kuroda.
Lagarde, however, added that the slowdown in China would not bring catastrophe for the global economy and that the jolts hitting the financial markets were ‘very normal.’ The IMF chief spoke on the last day of the World Economic Forum in the Swiss ski resort of Davos where news this week of decreasing growth in China – the world’s second biggest economy – spooked attendees from the global financial elite.
She further said that, “We are not seeing a hard landing but an evolution, a big transition which is going to be bumpy.”
“We have to get used to it and it’s a very normal and proper way to actually move towards a more sustainable and a more quality growth we all hope,” she added.
The Chinese government announced this week that its economy grew by 6.9% in 2015, the slowest rate in a quarter century.
Worries of a weak Chinese economy had already sown fears across global markets with share prices plummeting since January 1, also affected by low oil prices as a supply glut destabilises fragile energy-producing countries.
“What on earth is going on is simply the worst start of any year on the record on financial markets ever, it’s simple,” said French banker Tidjane Thiam, the CEO of Credit Suisse.
“The market is very worried about China of course. They fear we will fall into a global recession,” he added.
Published in The Express Tribune, January 24th, 2016.