'Chinese economy in major transition'

07 Oct '15

4 min read

The recent change in the exchange rate regime also had large ripple effects, particularly in Asia due to the uncertainty created by the move. However, the change in the exchange regime is consistent with the authorities' intention to move to a more market-determined exchange rate. Moreover, following a significant real appreciation over the past year, the yuan has only depreciated by around 3 per cent since the change. This does not alter the IMF's assessment that the exchange rate is broadly in line with medium-term fundamentals.

While China's economy slows as expected, the country's size and integration into the global economy mean that its performance affects those around it. One percentage point slowdown in Chinese growth translates into a 0.3 percentage point decline for other Asian countries. Such spillovers obviously are of concern, and recent experience suggests that spillovers to China's neighbors in Asia might have become even larger lately, coming not only through trade but also global financial market linkages.

The bottom line is: vigilance must remain the watchword. For China, that means focusing on the downside risks, and for the rest of the world, guarding against potential spillovers. If managed well—including with clearer communication to help guide market expectations—China's transition could provide the basis for renewed economic strength in a region that has led the world in growth for several years. (SH)

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