China's growth transition will be positive, Spain's economy minister says

[MADRID] Investors have overreacted to China's slowdown and the transition will prove positive for the global economy in the longer term, Spanish Economy Minister Luis de Guindos said.

"In the world economy, when you have a transformational mood of such an important economy as the Chinese economy, it has an impact," Mr de Guindos, 55, said in an interview with Bloomberg Television in Madrid. "In the short term, markets overreact, overshoot, but I think in the medium term that will be positive for world growth and world trade." China's cooling expansion and surprise currency devaluation last month has fueled concern about the global economy just as the US Federal Reserve prepares to raise interest rates for the first time in nine years. Global leaders will discuss the outlook in depth at a Group of 20 summit in Ankara starting Friday. Mr De Guindos - who is attending the meetings - said he expects Chinese officials will explain the situation facing the country at the meeting.

The Spanish minister said Chinese authorities have been "crystal clear" about the need to converge to lower growth rates. He also acknowledged that the pace of world expansion remains mediocre, fragile and uneven, and this creates "jitters in the markets, and volatility and unease." The Stoxx Europe 600 Index has fallen almost 10 per cent in the past month, while Spain's benchmark IBEX 35 has dropped 11 per cent.

Mr De Guindos put a positive interpretation on higher US interest rates, saying that will be a sign that the financial conditions in the world's biggest economy are starting to normalise.

"We cannot get used to living in a world with zero interest rates," he said in the interview at the economy ministry in Madrid. "Sometimes markets overreact but they will accept that, well, we have to normalise the situation." Mr De Guindos said he did not see any risk of a currency war in which nations or economic blocs weaken their exchange rates to give themselves a competitive advantage. Governments must avoid "beggar-thy-neighbour" policies, he said.

European Central Bank President Mario Draghi made similar comments in Frankfurt yesterday, saying that all G-20 nations have "several times reaffirmed their commitment" not to take such actions. He told reporters that uncertainty surrounding China will be "one the major themes" at the meetings in Ankara.

"A currency war is the prelude of a trade war, so I do not see it," Mr de Guindos said. "I think the Chinese authorities perfectly understand the situation and we should not repeat the mistakes that we made in the past during the times of the Great Depression."

BLOOMBERG