Markets have over-reacted in their negative assessment of the outlook for China’s economy and exchange rates, according to a senior IMF official and several fund managers.
The head of the IMF’s Asia Pacific department, Changyong Rhee, told Emerging Markets that China’s economic slowdown so far has been in line with the Fund’s expectations.
Meanwhile investors are starting to look at China’s stock markets with an eye to value following a 25% fall in the CSI300 index since July 23.
The Chinese slowdown is a dominant issue at the annual meetings and the IMF appears determined to counter undue alarm over the state of the world’s second largest economy.
“We don’t believe [in the idea of] a hard landing for China,” Rhee told Emerging Markets. “The current pace of slowdown is still in line with our expectations.”
The IMF has been criticised for sticking by what many see as its over-optimistic forecast that China’s economy will grow by 6.8% this year, at a time when some economists are suggesting that 5% or even lower might be the correct range.
But Rhee, a former chief economist at the Asian Development Bank and who is regarded as an authority on Asia, suggested that the actual growth trajectory so far was consistent with advice the IMF has given to China on how and at what speed its economic transition should be managed.
“We advised them to rein in credit growth, and that requires a slowdown. Our [growth] forecasts in the past two years have in a sense incorporated our policy advice. That is why our growth forecasts have been lower than those of others and that is why we are not revising [them] down.
“In the first half [of 2015] the actual growth rate was 7.0% against our forecast of 6.8%. If in the second half the growth rate is 6.5% they can reach 6.8% this year. We believe they have [fiscal] policy room if needed to maintain growth momentum.”
TWO-SPEED ECONOMY
Meanwhile some investors and fund managers are taking a more bullish stance on the world’s second largest economy. “Investors have been quick to downgrade growth forecasts for this year and next, but we believe some of this anxiety may have gone too far,” said Jade Fu, investment manager at Heartwood Investment Management.
“We continue to see an economy that is growing and not collapsing. There has been an overwhelming focus on manufacturing data disappointments in recent months, which has fuelled the bearishness among investors, but it should be remembered that China is running a two-speed economy as it rebalances towards domestic demand.”
However, the overwhelming view is cautious. Sonja Laud, income investment director in the Global Multi-Asset Group at Baring Asset Management, said China was hitting assets across emerging markets.
“Regional markets are particularly affected, given their dependency on exporting commodities to China,” she said. “As a consequence we take a defensive stance towards this region” in favour of developed markets.