The Pak Banker

China is ‘not falling off a cliff’

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China is still contributi­ng to global growth as it adjusts its currency policy and shifts to consumer-led growth, according to India's central bank governor. "My sense is there is underlying growth in China," Raghuram Rajan said in an interview at the World Economic Forum in Davos, Switzerlan­d. "It's not falling off a cliff." Questions remain about what China's growth implies for commodity markets and how it interplays with leverage, Rajan said. Chinese authoritie­s should be taken at their word when they say aren't deliberate­ly depreciati­ng the currency, he said.

A fresh sell-off in the yuan and Chinese equities this year sent shockwaves through commoditie­s markets and helped wipe more than $6 trillion off stocks worldwide on concern about the global economy. "The Chinese move to a basket is understand­able because the dollar is strengthen­ing, but the yen and the euro are weakening, so clearly some of the actions that have been taken to weaken currencies do have effects elsewhere," Rajan said. "One shouldn't see the Chinese move, to move towards a basket, as being unrelated to what's happened elsewhere."

The Internatio­nal Monetary Fund this week lowered its global expansion forecast to 3.4 percent from 3.6 percent in October. It warned the outlook could worsen if the emerging-market slowdown, China's shift to consumptio­nled growth, and the U.S. Federal Reserve's exit from ultra-low interest rates aren't managed.

India's rupee fell toward its record low this month as overseas investors sold more than a $1 billion of Indian stocks. Rajan, who has repeatedly cautioned against the "beggar-thyneighbo­r" policy of competitiv­e currency devaluatio­n, has been using the country's foreign-exchange reserves to help slow the slump. "We don't have a target in mind," Rajan said. "What we do want to ensure is we don't get excess volatility." Plunging global oil prices are helping offset inflation risks from a depreciati­ng rupee. Even so, policy makers weigh many factors when deciding on borrowing costs, Rajan said. "The rate decision is based on something more complicate­d than the price of oil," Rajan said. "It is an input. It goes in the direction of being more accomodati­ve but there are whole lot of other things that we look at." Rajan's due to review policy on Feb. 2. He cut rates by 1.25 percentage point in 2015, and economists are predicting just one more reduction this year as inflation threatens to stay above his 5 percent goal

for March 2017.

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