IMF chief Christine Lagarde yesterday said the slowdown in China would not bring catastrophe for the global economy and that the jolts hitting financial markets were “very normal”.
Lagarde 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.
But Lagarde told a panel: “We are not seeing a hard landing... We are seeing 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 said.
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 said.
British finance minister George Osborne, who also faced questions about Britain potentially voting to leave the European Union, said China had overshadowed proceedings at Davos.
“The world has not been very good over previous centuries at accommodating rising powers and it has often led to unhappy outcomes,” Osborne said bleakly.
“I think it is massively in our interest that we bring China into the multilateral institutions of the world,” he said.
Lagarde herself was also an issue at Davos, as she quietly campaigned to win backing for a second mandate as IMF managing director.
With her term coming to an end in July, the IMF formally began accepting nominations on Thursday for who will guide the global crisis lender for the next five years.
The biggest powers governing the Washington-based Fund, including Britain Germany and France, all gave their support to Lagarde this week.
In her first term, she was deeply involved in the decision to add the Chinese yuan to the IMF’s basket of reserve currencies, a highly symbolic move appreciated by Beijing.
Her plans to run again nonetheless face a potential hurdle: she could stand trial in France over her role in a banking scandal that predates her arrival at the IMF.
In December, judges placed her under formal investigation in the long-running affair of former Adidas boss Bernard Tapie, who received a large state payout for his dispute with a state bank during her time as finance minister. Lagarde has said she will fight the trial order, and the IMF executive board at the time reiterated its confidence in her.
She said financial markets need more clarity on how the Chinese authorities are managing their currency, particularly the relationship of the yuan to the US dollar.
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.
Bank of Japan governor Haruhiko Kuroda said his personal view was that capital controls would be an appropriate way for China to reconcile its need to keep domestic monetary policy loose while stabilising its currency.
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