Mood of relief after IMF/World Bank meetings, but doubts persist

AS the International Monetary Fund (IMF) and World Bank annual meetings in the Peruvian capital Lima drew to a close on Monday, the mood among the legions of government economic and financial officials, bankers and others attending was one of relief that - as one put it - "Armageddon has not arrived".

There were plenty of reasons for anxiety. Unconventional monetary policy has plunged global capital flows, exchange rates and stock markets into confusion while encouraging a massive build-up of corporate debt in emerging economies. Everyone in Lima was braced for a crash.

Meanwhile, to use the words of prominent Mexican banker Guillermo Ortiz, the centre of attention was China, appropriate for what historically has been known as the "Middle Kingdom". Many, he said, had expected to hear the worst about the world's second-largest economy, but in the event did not.

Markets have certainly been very bearish about the state of China's economy, and this has spilled over into something bordering on market panic at times. But IMF and World Bank officials as well as private-sector economists and analysts had a different story to tell in Lima.

No one denied that China's economy faces formidable challenges, and that the outcome of its leaders' efforts to steer through a transition from an export-led juggernaut to a domestic consumer and services-dominated economy is still a big unknown.

But as the head of the World Bank's Asia-Pacific Department, Changyong Rhee, told this newspaper in Lima: "We do not believe in a hard landing for China." Bank of Japan governor Haruhiko Kuroda expressed similarly positive sentiments about China to BT.

The world needed to hear such reassurances. China, after all, is a key dynamo not only for other Asian economies but also for the commodity-exporting nations of South America (including Peru), and is of key importance also to the Western hemisphere, not to mention the Middle East and Africa.

If China can maintain annual growth rates of 6-7 per cent, as many in Lima said it could, then a combination of relative US economic strength and Chinese economic resilience can keep annual global growth ticking over at around 3 per cent plus - and global recession can be avoided.

There was less reassurance to be had in Lima on the state of global financial markets. Stock and bond markets are courting a liquidity crisis while "flash crashes" could multiply on securities exchanges, as noted by Hung Tran, executive managing director of the Institute of International Finance.

Then, there is the huge build-up of debt among emerging-market corporates which, as Mr Tran suggested to BT, could stifle capital investment and drag down growth. Overall, the view was that Armageddon has simply been postponed, and that it can be averted only if policy reforms are accelerated.

It would be easier to be optimistic on this score, however, were it not for the fact that annual meetings of the so-called Bretton Woods institutions have heard similar warnings many times in past years, only to see warned-of crises subsequently materialise. Maybe this time will be different, or maybe not.