China seeks to calm global markets forecasting yuan stability

[ANKARA] China sought to ease concerns that its slowing economy could drag down global growth and signaled it won't get dragged into tit-for-tat currency valuations.

Yi Gang, deputy governor of the Chinese central bank, said Friday that his country's economy is solid despite the stock market selloff and the yuan will be stable. He spoke in an interview in Ankara where finance ministers and central bankers from the Group of 20 nations.

"The Chinese economy's fundamentals are fine," Mr Yi said. "No one can predict exactly on the market volatility, but I'm confident that the renminbi exchange rate will be more or less stable around the equilibrium level."

The deepening slowdown and devaluation in China are chilling investors' sentiment, roiling currencies and leaving the MSCI emerging market index down more than 16 per cent so far this year. A draft communique prepared before the meeting cited "recent volatility in financial markets" and the need to monitor potential spillovers.

Policymakers will discuss the problems in China without directly referencing them in the final statement, according to a member of the Russian delegation who spoke on condition of anonymity.

Once the darlings of the world economy as they helped lift it from its 2009 recession, emerging markets from China to Brazil have now slid amid declining trade, mounting debt, falling commodity prices and a rising US dollar. The sell-off in equity markets is already prompting parallels to be drawn with the Asian financial crisis of the 1990s.

"The Chinese slowdown is going to be a bumpy landing but something short of a rough landing," Nouriel Roubini, chairman of Roubini Global Economics, said in an interview in Cernobbio, Italy.

"Markets are now becoming too pessimistic about Chinese economic growth and the ability of their policy authorities to manage that growth slowdown and also manage the movements of the currency and stock market."

China's slowdown comes as the Federal Reserve is considering raising interest rates in the US for the first time in nine years The odds of an increase in September have fallen to 28 per cent from 40 per cent at the end of July, according to futures data compiled by Bloomberg. October's probability is 40 per cent and December's is 57 per cent.

"In line with the improving economic outlook, monetary policy tightening is more likely in some advanced economies, which may remain one of the main sources of uncertainty in financial markets," the draft communique said.

For evidence of how economies can be roiled by the global cross-currents, look no further than the G-20's host.

Turkey saw its currency plunge more than 20 per cent this year while bonds and stocks also tumbled. Foreign investors pulled out more than US$5.5 billion from Turkish government debt and listed-company stocks from the beginning of the year through Aug 21, according to a Bloomberg calculation based on official data.

Capital flows into such emerging-market economies fell in August by the most since 2013, according to the Institute of International Finance. Morgan Stanley this week cut its growth forecast for emerging markets in 2015 to 4.1 per cent from 4.8 per cent. Russia's economy will contract 3.4 per cent this year, according to the International Monetary Fund.

"The Chinese slowdown has a significant impact on the Russian economy," Russian billionaire Alexey Mordashov, executive chairman of steelmaker Severstal OAO, said in a television interview in Ankara. "We all know that the commodities boom of recent decades was largely driven by Chinese demand."

Complicating the outlook is China's surprise August decision to revalue the yuan, which caused the currency to drop the most in 21 years, triggering exchange-rate declines elsewhere in the emerging world on concern a weaker yuan will hurt exporters.

All the same, the deputy central bank governor, Mr Yi, forecast the economy would grow by 7 per cent this year. That would still make China the second-fastest economy in the G-20, according to International Monetary Fund forecasts.

"You see a lot of things happen in China making a lot of people outside of China concerned," former Sinopec Chairman Fu Chengyu said in a television interview. "But actually if you look into the details, the fundamentals of the economy, it doesn't change much."

BLOOMBERG