Low interest rates, labour reform key to minimising China-driven risk

Treasurer Joe Hockey flew out of Australia on Wednesday night to attend the gathering, after official economic data showed the local economy barely grew in the June quarter.

In broad-based advice to countries such as Australia, the IMF recommended advanced economies navigate the uncertainty by maintaining low interest rates and enact labour market reforms to boost worker participation.

"Fiscal policy should remain growth friendly and be anchored in credible medium-term plans," the IMF said.

The report said near-term negative risks for emerging economies had risen, due to China's growth transition and falling commodity prices which are hurting mining and energy exporters like Brazil and Russia.

As the US Federal Reserve prepares to raise interest rates, possibly this month, the Washington-based fund flagged that higher rates and a related rising US dollar could cause "adverse" consequences for emerging economies.

The greenback appreciation may put corporate balance sheets under stress as the cost of unhedged US-dollar borrowing rises and as capital flows reverse out of the once-fast growing emerging economies.

There was also the potential for "disruptive" asset price shifts, the IMF said.

The perfect storm for emerging markets; falling Chinese demand, falling oil prices in the case of energy exporters, slowing economic growth and rising US interest rates has been on the minds of policymakers and investors for several months.

Emerging market currencies including the Brazilian real, Russian ruble, South African rand, Mexican peso, Turkish lira, South Korean won and Vietnamese dong have been hammered in the past couple of months.

China shocked global investors last month, devaluing the yuan 4 per cent against the US dollar, a move that triggered panic in equity and currency markets.

Some observers worry the confluence of negative forces could inflict ructions similar to the 1997 Asian financial crisis, when hot money was yanked out of developing economies like Thailand, Indonesia and South Korea. Their currencies collapsed and foreign debts ballooned, impaling economies across east Asia.

Non-resident portfolio flows in emerging markets turned negative last month for the first time in 2015, the Institute of International Finance reported. Equity flows bore the brunt of the outflows, with $US8.7 billion being pulled.

Bank for International Settlements figures show that emerging market corporate debt has more than doubled in US dollar terms in China, Colombia, Brazil, Peru, Indonesia, Taiwan, Thailand and Mexico since 2008.

Emerging economy corporate bond yields have jumped to almost 6 per cent from about 5 per cent in the past three months, according to Bank of America Merrill Lynch.

However, Capital Economics senior markets economist David Rees downplayed the threat of a repeat of an emerging market crisis among companies.

"We think emerging market dollar-denominated corporate bonds will perform poorly over the coming years, but we do not agree with suggestions that they will be the source of an imminent EM crisis," Mr Rees said in a research note.

"One or two firms may run into trouble, particularly in Brazil, Russia and Turkey. But the prospects for those in parts of central Europe and emerging Asia appear much better."

On China, the IMF noted the slowdown in the first half of 2015 was broadly in line with previous forecasts, due to a "needed correction" in residential real estate construction and slowdown of investment.

Growth in the world's second largest economy and the largest buyer of Australian commodities is expected to decline as "excesses in real estate, credit, and investment continue to unwind".

The IMF said policy action by Chinese authorities would aim to reduce vulnerabilities from recent rapid credit and investment growth, but the interventions would not fully offset the moderation in activity.

Earlier on Tuesday, IMF chief Christine Lagarde said Chinese growth was "slowing but not sharply, and not unexpectedly".

"The transition to a more market-based economy and the unwinding of risks built up in recent years is complex and could well be somewhat bumpy," she said.

In emerging economies, growth this year is projected to slow again relative to 2014, though some rebound is projected next year.

Economic activity in advanced economies is projected to pick up modestly in the second half of the year and into 2016.

The downbeat commentary suggests the IMF will again downgrade its global growth forecasts next month.

In July, the IMF world economic outlook update projected global growth of 3.3 percent in 2015, strengthening to 3.8 percent in 2016.