Despite Sharp Slowdown in Chinese Economy, IMF Says Not Recession, Just “Necessary Adjustment”

In recent months, negative predictions for the Chinese economy filled the news, and less than stellar performance that seemed to prove those predictions correct. Many analysts had predicted that China might enter into an economic recession echoing the one that occurred in much of the world in 2008, but notably had a much less significant effect on China. Given China has the second largest economy in the world, such predictions have dire ramifications for the rest of the world.

In recent months, negative predictions for the Chinese economy filled the news, and less than stellar performance that seemed to prove those predictions correct. Many analysts had predicted that China might enter into an economic recession echoing the one that occurred in much of the world in 2008, but notably had a much less significant effect on China. Given China has the second largest economy in the world, such predictions have dire ramifications for the rest of the world.

These fears came into sharp focus over the last few days as China’s economic slowdown triggered a sharp fall in its stock market. However, according to the International Monetary Fund (IMF), these negative indicators do not predict a crisis, but simply a “necessary” adjustment.

The IMF analysis as reported by Reuters, points to recent evidence of slowing growth in China as the cause of the country’s poor performance on Friday. Wall Street had one of the largest declines in nearly four years.

According to Carlo Coattarelli, an IMF Executive Director, “Monetary policies have been very expansive in recent years and an adjustment is necessary…It’s totally premature to speak of a crisis in China.”

Coattarelli reiterated the IMF’s prior forecast of a 6.8 percent expansion of the Chinese economy for 2015. While this rate of growth is quite respectable, it is less than 2014’s growth of 7.4 percent. To put that figure into perspective, IMF predicts global growth at 3.3 percent for 2015, and US economic growth a mere 2.5 percent. That makes China’s economic growth still quite admirable and well ahead of most other major economies.

According to the IMF, the slowing of the Chinese economy is natural. Although it created a shock to the global financial markets, the IMF believes this was merely reactionary and not indicative of long-term institutional weakness. The IMF sees the slowdown as the natural consequence of years of rapid growth with little breaking, even as the rest of the world suffered a slowdown.

Some believe this growth has been artificially buoyed by the Chinese government’s policies and by their sometimes, questionable economic performance reporting. This lack of reliable transparency has left some to question just how much of the global recession China’s economy actually absorbed without honest reporting. Others believe the economy may be teetering on collapse.

However, the IMF dismisses these concerns as overly pessimistic. It believes both government reporting and independent metrics paint a much rosier picture of an economy slowly tapering off after years of explosive growth.