World growth out­look with­stands cur­rency cri­sis

The Pak Banker - - COMPANIES/BOSS -

Global growth pro­jec­tions are hold­ing up against China's sur­prise move to change its ex­change-rate regime as econ­o­mists re­main con­fi­dent a slow­down there won't be se­vere enough to de­rail the world econ­omy. Fore­cast­ers see the global econ­omy gain­ing 3.1 per­cent in 2015, un­changed from their con­sen­sus view a month ear­lier, a sur­vey of econ­o­mists showed. Re­spon­dents pre­dict growth will ac­cel­er­ate to 3.5 per­cent next year, com­pared with 3.6 per­cent in the prior sur­vey, ac­cord­ing to the me­dian es­ti­mate.

The Peo­ple's Bank of China moved to weaken the na­tion's cur­rency Tues­day, touch­ing off the yuan's steep­est two-day drop since 1994. While the Chi­nese ac­tion stirred spec­u­la­tion that the na­tion's growth mo­men­tum may be slow­ing more than ex­pected, most econ­o­mists said the global fall­out from the de­val­u­a­tion will be min­i­mal.

"I don't think we should see the de­val­u­a­tion as a bad thing for the global econ­omy and global growth," Robert Minikin, head of Asia for­eign-ex­change strat­egy at Stan­dard Char­tered Bank in Lon­don, said in a phone in­ter­view on Wed­nes­day. "To the ex­tent that it's an or­derly, con­tained ad­just­ment, and that ac­tu­ally brings us to­ward a more rea­son­able set of FX rates, it could ac­tu­ally be a healthy de­vel­op­ment."

China's cen­tral bank cut the cur­rency's ref­er­ence rate by 1.9 per­cent on Aug. 11 and has low­ered it fur­ther since. Un­der the PBOC's new sys­tem to set the daily fix­ing, mar­ket mak­ers who sub­mit con­tribut­ing prices must con­sider the pre­vi­ous day's close, for­eign-ex­change de­mand and sup­ply, as well as changes in ma­jor cur­rency rates. The PBOC said in a press con­fer­ence that there's no ba­sis for de­pre­ci­a­tion to per­sist and pol­icy mak­ers will step in to con­trol large fluc­tu­a­tions.

Two mo­ti­va­tions could have prompted China's de­ci­sion, said Zheng Liu, a se­nior re­search ad­viser at the Fed­eral Re­serve Bank of San Fran­cisco. The move might be part of the na­tion's push to make the cur­rency more freely float­ing in or­der to meet the cri­te­ria to be­come a mem­ber of the IMF's Spe­cial Draw­ing Rights bas­ket of re­serve cur­ren­cies.

"It's more likely that in China, the gov­ern­ment re­al­izes that the slow­down is worse than they thought, so they're try­ing to stim­u­late the econ­omy," he said in an in­ter­view on Wed­nes­day. Chi­nese growth that's weaker than ex­pected could drive com­mod­ity prices and global in­fla­tion lower, he said.

China's move came against a back­drop of lack­lus­ter eco­nomic data: The In­ter­na­tional Mon­e­tary Fund pro­jected in July that the coun­try's econ­omy will ex­pand 6.8 per­cent this year, down from 7.4 per­cent growth in 2014. Re­ports in re­cent days have showed a pull­back in Chi­nese in­dus­trial pro­duc­tion and a slump in ex­ports.

The yuan changes were prob­a­bly partly "a pan­icked de­ci­sion by some politi­cians in China" in re­sponse to the na­tion's eco­nomic slow­down, Adam Posen, pres­i­dent of the Peter­son In­sti­tute for In­ter­na­tional Eco­nom­ics in Washington, said in an in­ter­view on Tues­day. "It also raises the prospect that their panic is based on them know­ing some­thing bad that we don't know yet -- we be­ing peo­ple out­side the gov­ern­ment." The yuan weak­en­ing will cre­ate win­ners and losers, Minikin said. A cheaper yuan could cost trad­ing part­ners in Asia, whose goods be­come less com­pet­i­tive when their cur­ren­cies be­come more ex­pen­sive against China's. That ef­fect could be off­set if China's move boosts its ex­port per­for­mance, caus­ing pos­i­tive re­ver­ber­a­tions through­out the sup­ply chain.

"If you do get a fur­ther de­pre­ci­a­tion in the cur­rency and that helps the Chi­nese econ­omy, that could be very pos­i­tive for global growth," said Gen­nadiy Gold­berg, a U.S. rates strate­gist at TD Se­cu­ri­ties in New York. In the US, eco­nomic spillover from the de­val­u­a­tion will prob­a­bly be lim­ited, econ­o­mists said.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.