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August 22, 2015 | Don’t Worry, IMF Says “Premature” to Speak of Chinese Crisis

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Growth in China is slowing rapidly. How rapidly is a subject of much debate. Today, a senior IMF official says ‘Premature’ to Speak of Chinese Crisis.

China’s economic slowdown and a sharp fall in its stock market herald not a crisis but a “necessary” adjustment for the world’s second biggest economy, a senior International Monetary Fund official said on Saturday.

Fresh evidence of easing growth in China hammered global stock markets on Friday, driving Wall Street to its steepest one-day drop in nearly four years.

Monetary policies have been very expansive in recent years and an adjustment is necessary,” said Carlo Cottarelli, an IMF executive director representing countries such as Italy and Greece on its board.

“It’s totally premature to speak of a crisis in China,” he told a press conference.

He reiterated an IMF forecast for a 6.8 percent expansion in the Chinese economy this year, below the 7.4 percent growth achieved in 2014.

China’s real economy is slowing but it’s perfectly natural that this should happen … What happened in recent days is a shock on financial markets which is natural,” he added.

China’s stock markets have fallen more than 30 percent since mid-year. Following a slew of poor economic data, Beijing devalued the yuan in a surprise move last week.

Crisis Talk Premature?

Is crisis talk premature? The answer depends on what “crisis” means. It may depend on growth estimates as well.

While, I concur this is a “necessary” adjustment, necessary does not imply “no crisis”.  For example, the US housing crash was a necessary adjustment as well.

Another crash or lengthy correction in equities is  coming as well. Does that constitute a crisis?

It certainly will to pension plans that are still hugely underwater despite the massive rally in equities globally.

And what about the IMF forecast for a 6.8 percent expansion in the Chinese economy this year? That estimate I believe we can all laugh at. Actually, nearly all IMF growth forecasts are laughable.

And no one, except apparently the IMF, remotely believes China’s stated GDP numbers in recent years. Looking ahead, four percent or even two percent growth are more likely than 6.8 percent (no matter what numbers China officially says).

Would four percent growth constitute a crisis? Two percent?

It depends on your definition, but it will likely come with a very “necessary” (and steep) correction in global equities and junk bonds.

Don’t Worry

But hey, don’t worry yet. Wait until it’s universally clear a crisis is underway. Then worry. That’s the apparent message from the IMF.

Mike “Mish” Shedlock

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August 22nd, 2015

Posted In: Mish Talk

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