Yi Gang: Global cooperation, China's economy and the IMF
Statement of Dr Yi Gang, Deputy Governor of the People's Bank of China, at the Twentieth
Meeting of the IMFC, Istanbul, 4 October 2009.
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I. The global economy and financial markets - prospects and policy response
The outlook of the global economy and financial market has improved, thanks to the stimulus
policies and financial sector support measures. However, the recovery remains to be
established as the effect of the manufacturing sector rebounds and inventory adjustment
may be short-lived. The lingering deleveraging, credit crunch, and financial market instability,
as well as weak private demand, all point to a slow recovery.
The global economy is confronted with the risks of rising trade and investment protectionism,
delayed restoration of the normal functioning of the financial system, and uncoordinated
macroeconomic policies. The pressing task is to join efforts to fight protectionism, stabilize
the financial markets, and restore growth. It is essential for the major markets to accelerate
financial reforms, strengthen supervision, remove toxic assets, and enhance capital
adequacy. Coordination of macroeconomic and financial sector policies is also crucial.
At the critical stage of global recovery, the IMF has an important role to play in policy
coordination. It needs to monitor more closely risks and policy implementation, particularly
the progress of financial sector restructuring and supportive fiscal and monetary policy
implementation in developed countries, as well as capital flows, to promote relative stability
of the exchange rates of major reserve currencies.
Our attention must focus appropriately on the areas where policy action and coordination are
most critical and urgently needed. Global cooperation is needed to secure a more open trade
system, accelerate comprehensive structural reforms and improve allocation of resources. It
is of particular importance to remove impediments to productivity growth, particularly in the
labor, product, and service markets. Such actions are fundamental to strong and sustainable
global growth. We also call on the IMF and the World Bank to explore ways to reallocate
more resources to developing countries, raise their potential growth, and accelerate their
income convergence with the developed world.
II. Chinese economic developments and policies
The Chinese economy outperformed the expectations in the first half of 2009. With
acceleration of investment growth, the real GDP grew 7.1 percent. In the first eight months,
fixed asset investment grew by 33 percent in urban areas, retail sales by 15.4 percent, and
industrial output by 12.3 percent. Although the monthly average CPI declined by 1.2 percent
in the same period year-on-year, the August CPI registered a 0.5 percent increase from the
previous month. Money growth accelerated in the first eight months, with M2 and M1 up 28.5
percent and 27.7 percent respectively, resulting in a credit growth of 34.1 percent. The
renminbi exchange rate remained stable.
The domestic demand has become the dominant source of growth. The package of
macroeconomic measures in response to the global financial crisis - suited to the Chinese
circumstances - has proven to be timely, forceful, and effective, and has helped reverse the
sharp decline in growth. The projected growth target for this year is within reach.
Efforts are also being made to contain fiscal and financial risks. The government intends to
limit the fiscal deficit and public debt to around 3 percent and 20 percent of GDP,
respectively. The banking system has improved its asset quality and resilience to shocks.
The nonperforming loan ratio of the banking sector declined by 0.64 percentage points in the
first six month to 1.8 percent at end-June. And their capital adequacy stood at 11.1 percent.
The Chinese government is faced with an uncertain global environment. In the first eight
months, exports dropped by 22.2 percent while imports, by 22.7 percent. The task for
structural adjustment remains formidable. While the effect of the supportive policies is
expected to phase out, the measures aimed at addressing longer-term issues will take time
to yield results. The government is committed to maintain stable and consistent
macroeconomic policies while accelerating structural adjustment. Promotion of domestic
demand, particularly consumption, will remain a top priority. In this regard, the government is
committed to maintain a reasonable investment growth, improve investment structure, and
enhance efficiency by eliminating inefficient capacity and encouraging merger and
restructuring.
It will continue to restructure and revitalize key industries, encourage innovation, and improve
the people's livelihood. It will monitor closely the developments in the domestic as well as the
global economy and stand ready to take contingent actions, as necessary. China will also
remain vigilant against various potential risks, including the risk of inflation, and sustain
strong economic growth.
Against the economic rebound in mainland China and easing of the downside risks in the
global economy, the Hong Kong SAR economy in the second quarter recorded a 3.3 percent
rebound over the previous quarter, and the decline in exports moderated. Total employment
stabilized and the unemployment rate was 5.4 percent. The underlying consumer price
inflation eased to 1.2 percent in the second quarter over a year ago. For 2009 as a whole,
real GDP is projected to contract by 3.5-4.5 percent and CPI inflation is projected at 0.5
percent.
Hit by the global recession, the economy of Macao SAR contracted 12.8 percent in the first
half of 2009, with pronounced declines in both exports and investment. However, labor
market performance remained stable, with the latest unemployment rate remaining at 3.7
percent. Inflationary pressures were quickly alleviated. As the tourism industry income
stabilizes, economic activity is gradually improving, and the decline in GDP is expected to
moderate gradually in the second half of the year.
III. Reform and future mandate of the Fund
The current financial crisis, which originated in developed countries, has resulted in
substantial losses for the countries of the world. The failure of major international financial
institutions to issue timely early warnings highlights the consequences of its misfocused
surveillance. Only through the acceleration of fundamental reforms will the major
international financial institutions be able to discharge the mandate assigned to it by its
member countries.
The persistently misaligned quota shares and underrepresentation of emerging market and
developing countries hamper Fund governance and even-handed surveillance. It undermines
Fund legitimacy and effectiveness. The traditional unreasonable quota allocation and
adjustment method have intensified the misalignment. It is critical that the Fund complete in a
timely manner the reform objective announced by the G-20 leaders, namely a shift of at least
five percentage points of the quota shares in favor of the emerging market and developing
country members.
We support increasing Fund resources through a variety of means. However, the Fund is a
quota-based institution and quotas should be its primary resource. From the long-term
perspective, the Fund should introduce a reasonable automatic quota adjustment process in
order to reflect changes in the relative economic positions of its members and avoid serious
quota share misalignment. We join in the call for prompt approval of the 2008 quota reforms.
Building on the quota reform, we support the broader reform of Fund governance, which will
result in a strengthened role of the Executive Board, better oversight over the management,
and a transparent, competitive, and merit-based process of management selection.
Emerging market and developing countries should also have greater participation in
management and staff.
Even-handed surveillance is an important condition for Fund legitimacy and effectiveness.
The Fund needs to strengthen surveillance over major financial markets. Its policy analysis
needs to be balanced, giving full regard to members' circumstances. The 2007 Decision
distracted the attention of the Fund and the international community from real systemic risks,
and delayed policy responses. The revision of the operational guidance in May was a small
step in the right direction. We call for a timely thorough review of the 2007 Decision in order
to avoid a recurrence of past mistakes.
We welcome the progress achieved with the Early Warning Exercise (EWE), and support the
continued cooperation with the FSB to improve EWE methodology and enhance EWE
capabilities. With regard to EWE communication issues, the Fund needs to ensure both
communication effectiveness and confidentiality of sensitive information. The analytical
results of the EWE should be integrated with multilateral and bilateral surveillance. It is
particularly important to ensure that the developed countries with significant vulnerability and
potential spillover risks implement appropriate measures to address such risks and that
policies are implemented in the areas that require joint efforts.
We welcome the package of reform measures adopted by the Fund with respect to lending
facilities and financing mechanisms for low-income countries. The international community
should pay close attention to and minimize the damage to low-income countries caused by
the current financial crisis. We call on the international community to provide greater support
to help low-income countries weather the crisis. We welcome the Fund's increased flexibility
with nonconcessional financing to low-income countries. Given the large gap for
development financing, we call on the Fund to work with other international financial
institutions to explore new financing mechanisms for more effective reallocation of productive
resources to low-income countries.
The current crisis has caused severe damages to the current international financial system.
Restoration of international monetary and financial order is the shared responsibility of the
Fund and the whole membership. The result of our efforts will be critical to the future of the
Fund and the world economy. And the capacity of the Fund to deliver depends on the
outcome of the reforms currently under way. A significant quota realignment along with other
governance reforms could help it go a long way toward enhancing its legitimacy and its
effectiveness in promoting global financial stability and sustainable growth through
independent, even-handed, and effective surveillance.