“What we’ve got here is a failure to communicate,” goes the famous line from Paul Newman’s iconic 1967 film, Cool Hand Luke.
It’s also the basic assessment by the International Monetary Fund on China’s management of its economic slowdown.
In a report released Monday, the IMF said that China should be able to manage its economic slowdown, but needs to communicate policy more effectively.
After a summer where Beijing rattled the global financial markets over its handling of the sharp decline on its stock market and the subsequent decision to let the Chinese currency float on Aug. 11, many came to the conclusion that the Chinese government has no idea what it’s doing.
Asia Unhedged agrees with the IMF. It’s China’s inability to effectively communicate what’s going or, or what it plans to do, that is undermining people’s perceptions of the economy, not a failure of fundamentals. China’s fundamentals are still strong.
Still, the IMF said if China wants to return to sustainable growth it needs to govern more effectively and expand markets. “This will require, in particular, hardened budget constraints for both state-owned and private firms, and continued strengthening of the financial supervision framework,” said the report.
The report said that every percentage point slowdown in China’s growth translates into a 0.3% decline for other Asian countries.
“Spillovers have been magnified by forces that extend beyond China’s border – including falling commodity prices and the prospect of an increase in U.S. interest rates – which could produce downward pressure on Asian neighbors,” the report said.
The report also said after the yuan’s 3% depreciation in August, its exchange rate was in line with “medium term” fundamentals.