Lagarde Says China Economy Strong Enough to Weather Stock Plunge

China’s economy should prove resilient enough to withstand the stock-market rout that has prompted unprecedented efforts by the Chinese government to stem the decline, IMF Managing Director Christine Lagarde said.

“We believe the Chinese economy is resilient, and strong enough to withstand that kind of significant variation in the markets,” Lagarde said Wednesday in an online press conference from Washington.

 She noted that Chinese stocks have still appreciated significantly over the last year, even after dropping almost 27 percent since June 12.

 Lagarde said no one should be surprised that Chinese authorities have taken steps to “maintain an orderly movement.” “It’s not a very well-established, long-standing market that has been around for decades and decades, as has been the case in either the United States or some of the European Union markets,” she said.

“It’s a relatively young market, and there is an element of a learning curve, both by the market players, by those who invest, by those who raise capital and of course by the authorities as well.”

The International Monetary Fund has urged China to eventually unwind measures taken to stem the selloff, a person familiar with the matter said this month.

 In an effort to bolster consumer confidence and prevent soured loans backed by equities from infecting the financial system, China banned large shareholders from selling stakes, ordered state-run institutions to buy shares and let more than half of the companies on mainland exchanges halt trading.

Temporary Measures

 The Washington-based fund told the Chinese government that while interventions in general are appropriate to prevent major disorder, prices should be allowed to settle through market forces, said the person, who is familiar with IMF discussions on the issue and asked not to be identified because the talks are private.

 Chinese officials assured the lender that the measures should be considered temporary, the person said. The IMF is in discussions with China over adding the yuan to its Special Drawing Rights basket of currencies alongside the dollar, euro, yen and pound.

China’s request to join is subject to approval from the IMF board and may hinge on whether the yuan, officially called the renminbi, is deemed “freely usable.” The IMF didn’t link its concern over the stock-market intervention to the fund’s review this year of whether to endorse the yuan as a reserve currency, said the person.

 Lagarde said the stock-market interventions shouldn’t “unduly derail” the prospects for the yuan to be included in the SDR basket. The IMF has been comforted by the “very significant reforms” the Chinese have made to their financial system, she said.

 Such reforms “will be conducive one day, when the time comes, once all the signals are checked positively” to the yuan being included in the SDR basket, she said.

bloomberg.com