Markets need clarity on yuan: IMF chief

Managing Director of the International Monetary Fund (IMF) Christine Lagarde at the annual meeting of the World Economic Forum (WEF) in Davos, Switzerland on Jan 23, 2016.
Managing Director of the International Monetary Fund (IMF) Christine Lagarde at the annual meeting of the World Economic Forum (WEF) in Davos, Switzerland on Jan 23, 2016. PHOTO: REUTERS

DAVOS • Financial markets need more clarity on how the Chinese authorities are managing their currency, particularly the relationship of the yuan to the US dollar, International Monetary Fund (IMF) chief Christine Lagarde said yesterday.

Sharp swings in the yuan have contributed, along with a dramatic fall in the price of oil, to global market volatility since the beginning of this year.

Bank of Japan governor Haruhiko Kuroda, speaking on the same panel at the World Economic Forum in Davos, said he believed China should use capital controls to stabilise its currency while keeping domestic monetary policy loose.

Asked whether she would back capital controls by China for a period, Ms Lagarde 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."

The market, she said, 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.

Mr Kuroda said China was right to keep monetary policy accommodative to help cushion the country's transition from an export-led industrial economy to a demand-driven consumer economy without excessive depreciation of its currency.

"This is my personal view and may not be shared by the Chinese authorities, but in this kind of contradictory situation, capital control could be useful to manage exchange rate as well as domestic monetary policy in a consistent, appropriate way."

He said Beijing was struggling to avoid either an excessive depreciation or an excessive appreciation of its currency.

China announced last week that its economy grew by 6.9 per cent last year, the slowest rate in a quarter century.

Worries of a weak Chinese economy have already sent investors into a panic globally and many fear the Chinese economy is facing a "hard landing".

But Ms Lagarde told the Davos panel: "We are not seeing a hard landing... We are seeing an evolution, a big transition which is going to be bumpy."

Britain's Chancellor of the Exchequer George Osborne said that even at the current growth rate, China would add the equivalent of Germany to global output by the end of this decade.

"We actually believe that China will have a soft landing," said Credit Suisse chief executive officer Tidjane Thiam.

The Chinese central bank has been generous with liquidity, pumping a net 315 billion yuan (S$68 billion) into the banking system ahead of the Chinese New Year holiday starting in two weeks.

It was the biggest weekly injection since January 2014 and analysts suspected it was larger than that warranted to avoid any hint of a cash crunch during the long holiday.

According to sources, Ms Zhang Xiaohui, an assistant governor of the Chinese central bank, said it would not rush to cut the amount of cash that banks must hold in reserves, as doing so could send a strong signal on policy easing.

Mr Yi Gang, a vice-governor of the central bank, also said it would keep the yuan basically stable against a basket of currencies.

Italian Economy Minister Pier Carlo Padoan told Reuters the IMF board's decision to include China's yuan in the basket of major currencies used to calculate the Special Drawing Rights in which the Fund lends to members was "an additional positive constraint" on China's management of its currency.

REUTERS, AGENCE FRANCE-PRESSE

A version of this article appeared in the print edition of The Sunday Times on January 24, 2016, with the headline 'Markets need clarity on yuan: IMF chief'. Print Edition | Subscribe