Might be time for China to tighten policy, not ease says IMF

By Marc Jones LONDON (Reuters) - It could be time for China to tighten monetary policy rather than ease it further to avoid the risk of overheating in parts of the giant economy, one of the International Monetary Fund's top officials said on Friday. The deputy division chief of the IMF's Asia department, Roberto Guimaraes, told Reuters that further Chinese interest rate cuts and stimulus could increase the chance of unhealthy debt growth. "You need sometimes to jump-start growth if the growth is decelerating too quickly, but at the same time you don't want to revive old growth engines. So the monetary policy (at present) perhaps goes a little bit too much in that direction," Guimaraes said at an event organised by the CSFI think-tank. The opinion may raise a few eyebrows. A flurry of easing measures from China at the start of the year helped stabilise rattled global markets and more than fifty central banks have cut rates or used other forms of easing since the start of 2015. For the IMF though there are concerns. China's corporate debt now stands at about 160 percent of gross domestic product and it has said corporate loan vulnerabilities need to be urgently addressed. "The first step would be not easing policy further," Guimaraes said. "Second would be signalling that perhaps there will be some sort of normalisation of monetary policy, raise interest rates gradually or having liquidity managed to make sure there is not excess liquidity in the system." Part of reason for the view is that despite its debt concerns, the IMF doesn't expect a sudden and painful 'hard landing' of China's economy. The counter argument that cheaper borrowing could help consumer consumption and accelerate a better balance in China's manufacturing economy was potentially valid, he said, but that it could be done in alternative ways such as increasing social safety nets that would cut the need for precautionary savings. Guimaraes also spoke about the volatile moves in the Japanese yen , which is also creating powerful currents in Asia. It has surged 15 percent over the last six months and has been particularly unpredictable this year despite some radical moves such as the introduction of sub-zero interest rates. "I think right now we are in a situation where perhaps a little bit more guidance (from the Bank of Japan) would be welcome," Guimaraes said. "There are a lot of upsides to that. Clarifying that there are a lot of global factors which have been behind the recent movements of the yen and not just the policy actions." He said the IMF was watching the situation closely but that currency markets had maybe overinterpreted the moves. "I think people were thinking too closely that this appreciation of the yen had to do with negative rates and that the policies were not working. I think there is more to the story." (Reporting by Marc Jones; Editing by Toby Chopra)