Transcript of a Press Briefing on Launch of Regional Economic Outlook (Asia and Pacific)

April 29, 2014

Hong Kong
Monday, April 28, 2014

Changyong Rhee, Director, Asia and Pacific Department

Romain Duval, Division Chief, Regional Studies Division, Asia and Pacific Department

Roberto Fernandes Guimaraes-Filho, Deputy Division Chief, Regional Studies Division, Asia and Pacific Department

Shaun Roache, Resident Representative in Hong Kong SAR

Rhoda Weeks-Brown, Deputy Director, Communications Department

QUESTIONER: I have some question about the Chinese debt problem. Will it be a very serious problem this year? As recently the debt problem in some Chinese banks seems to become more serious, what will you expect? Will it affect the Chinese monetary environment?

MR. RHEE: Regarding China’s debt problem, I think you can think about two different kinds of debt. One is foreign currency denominated debt, and the second one is the domestic debt. We have less concern about the foreign currency denominated debt because China has ample reserves and also China still has capital controls. I think that unlike the other cases of emerging countries’ foreign exchange crisis, we don’t see that is a real concern at this moment. But on the other hand, China’s leverage has increased quite significantly especially after the 2008 global financial crisis and as part of the stimulus package to cope with the slowdown of Chinese economy, and most of the debt is channelled through non-bank intermediation, the so-called shadow banking.

Having said that, still we believe that Chinese economy has room to manage its debt problems because of large reserves. Also its banking sector is well regulated and there are lots of fiscal resources. When something bad happens, the government can step in. Even for the local governments, local governments own lots of land. So, there’s a large policy room to address this issue.

Rather than being a short-term problem, this is an issue of efficiency of investment. If this credit growth leverage continues, it may cause a large problem in the future. So, I think China is in a very important moment. If you address this question rightfully, I think China can have more sustainable and safe financial system.

But on the other hand, if the credit expands more and more, then I think Chinese government will find later on it will be very difficult to handle it, especially if it’s combined with a real estate slowdown. That can cause some problems not easy to solve.

One good news is that when our Managing Director Christine Lagarde and I visited China last month, we met many senior Chinese officials and they all understand this problem very well. They are now doing many steps, many structural reforms to address this leverage issue and also shadow banking issues. It won’t be an easy task. They all say that it will be a bumpy course. But I think that given that the authorities understand this problem and are addressing this problem, we hope that it can be solved gradually. Thank you.

MS. WEEKS-BROWN: In the front row, please. Again, please identify your affiliation.

QUESTIONER: Just one quick question about the recent weakening of the renminbi. Because the renminbi has been weakening these days, what’s the implication, from IMF point of view, do you encourage or support this kind of move?

MR. RHEE: We welcome the recent announcement to widen th band. This is, I think, right and will contribute to the Chinese economy rebalancing. Then I think there is some discussion recently about whether the renminbi will depreciate further. But considering the current account surplus in China and the strong market fundamentals, I think that the chance for large depreciation of the renminbi will be small. I think China has to move more on the flexible exchange rate system gradually to make Chinese economy not only just focus on the export sector. But to have a more internal balanced economy, I think exchange rate flexibility is a very important issue.

QUESTIONER: So, it’s the IMF’s point of view that the exchange rate should depreciate.

MR. RHEE: No. I think the IMF does not focus or does not say that which direction the exchange rate has to go. But on the other hand, we are saying that widening the band is the right movement to allow for more flexibility.

MS. WEEKS-BROWN: Maybe the gentleman in the back row.

QUESTIONER: Just a comment on the recent news from Ukraine and Europe, and whether you see an impact on Asia’s economies in the short or mid term.

MR. RHEE: At this moment, I think Asia’s exposure to Ukraine and Russia is quite limited. Even Japanese banks, their assets to Russia and their lending to Russia and Ukraine is quite limited. So, I don’t think there is any significant direct impact from Ukraine or Russia to Asia as a whole. But on the other hand if the Ukraine situation becomes aggravated, maybe several Asian economies, which rely on gas imports or oil imports from Russia, will be negatively affected. But at this moment, the impact from Ukraine is quite limited for Asia.

MS. WEEKS-BROWN: Maybe in the second row.

QUESTIONER: I have a quick question about Hong Kong housing prices. I see the report uses the indicator of price to rent ratio in Hong Kong. It seems like it’s 20 to 40 per cent higher than the historical averages. Do you mean that a correction of housing prices in Hong Kong could also be 20 to 40 per cent in the next two to three years or do you consider other indicators?

MR. RHEE: It’s not easy to forecast asset prices. I think we know that Hong Kong real estate prices have increased quite rapidly, almost twice from 2008. So, some adjustment is necessary. At this moment, we are very happy to see that it’s moving gradually and it’s stabilized. The Hong Kong government has used very effectively many macroprudential policies. So, I think as interest rates goes up because of QE tapering, this is one issue that Hong Kong authorities have to focus on. Probably they have some room to adjust macroprudential policies to have a soft landing. How much it’s going to go down will be very hard to forecast at this moment.

MS. WEEKS-BROWN: The lady in the third row.

QUESTIONER: Recently we’ve seen that there is a shutdown of a property developer in China. Do you expect the Chinese government will be more tolerant on the shutdown of property developers in the future and do you see there will be a stimulus package from the Chinese government?

MR. RHEE: What I can say is that if China’s growth rate slows down more than the government thinks is desirable, probably they will rely on small, mini stimulus. In that case, definitely I think they will look at investment. But what I believe is that by talking with the authorities, they learned a lesson from the 2008 stimulus plan.

At that time, the Chinese government relied heavily on the real estate investment as a way to boost up the demand, but they later on realized that undesirable side impact. I cannot predict but I believe that this time if they need a mini stimulus, they will target more on other investment, such as health and education and in areas where there are no oversupply rather than focusing on real estate development. But specific cases, I cannot answer. Overall, I think they know now the negative side impact of just boosting up real estate development.

QUESTIONER: So, the government will stabilize the property market.

MR. RHEE: Yes, I think the government fully understands the importance of having a soft landing of some of the property market prices. But on the other hand, if you look at the property prices, if you still look at the big cities such as Beijing and Shanghai, there’s no signs of price decline. It’s more on the third and fourth tier cities. In those cities, the government wants to try some measures to have a soft landing.

MS. WEEKS-BROWN: We should probably take one of the online questions. This is from Dennis Chang of AFP. What are the main concerns regarding housing prices in Hong Kong and Singapore, and how can governments make adjustments without jeopardizing the economy and social stability? Again, regarding the real estate market and how we can make adjustment without jeopardizing.

MR. RHEE: It’s the same question, right. First of all, the borrowing cost will increase. That will definitely have a negative impact on real estate prices. So, the question is, when the price of real estate starts to fall more than the desirable level, what kind of tools the government can have.

In Hong Kong for example, the government relied on many macroprudential policies such as the stamp levy and other measures. If they think it’s necessary, they may weaken those strong macroprudential measures which they introduced at the time of the capital flows. Now if they believe that there is a need, they may loosen some of the macroprudential policies and also use liquidity injection for some financial institutions if they have certain problems.

MS. WEEKS-BROWN: We should probably begin wrapping up. Okay, I’ll take the lady there.

QUESTIONER: You have just mentioned that during the quantitative easing period, there was a massive inflow of capital into the emerging market. As the US begins its tapering now, do you think that there is a massive outflow of capital from the emerging market to the developed market now? Then what will be the impact and will it be another round of crisis because of the capital outflow from these areas? Thank you.

MR. RHEE: Actually, I have shown you this one slide which has this data, but I didn’t do it enough. The thing that you just mentioned is what we worried about in last May. In last May when QE tapering was first announced, actually capital started to flow out from Asia and we were very concerned about the capital outflow from the region.

At least for Asia, now we don’t have a very detailed official data. Some of the early sign that we are now getting is that from January on, capital started to flow back into Asia. I think probably because of the relative strong market fundamentals in Asia. Also partly due to the Fed announcement that QE tapering will be orderly and gradual. So, the confidence seems to be recovered a little bit.

Actually, at this moment, we have another concern. At this moment, if the capital moves back quickly to Asia, then I think Asia may not learn the right lesson from the mini crisis in last May. Mini crisis last May taught us that Asia is vulnerable and we have used policy space. Probably it’s time for us to be more vigilant and restore our policy space, such as checking our fiscal deficit and reining in credit booms.

But if capital moves quickly to us again, then probably we have to be concerned that some Asian economies which have to learn a right lesson may be a little bit more complacent and maybe don’t do the homework. Then I think that may cause a larger problem in the future. I think that is one of the reasons why we choose the word this is the time for vigilance and reform. At this moment, as the uncertainty and the risk from advanced economies is receding, we have to use this time to do the reform, to build up our policy space again.

MS. WEEKS-BROWN: Maybe we’ll go all the way to the back, the last row, the lady back there.

QUESTIONER: I have a few questions. First of all, can you comment more about the reasons why China’s GDP growth will be slower? The next question is that Japan has increased its sales tax from 5 per cent to 8 per cent, also the Japanese yen is depreciating. Can you comment on these matters? The third question is that New Zealand has increased its interest rate. Will it lead other Asian countries to increase their interest rate? Thank you.

MR. RHEE: Let me answer the second question first because I talked of China many times already. For Japan, definitely the consumption tax increase will have important implications for the second quarter growth of the Japanese economy. We are expecting that Japan’s growth rate in the second quarter will be in the minus, negative range. The Japanese government also simultaneously announced the fiscal expansion to offset some of the negative impact of this consumption tax increase.

So, it’s natural to have a negative growth in the second half because some consumption has already happened in anticipation of the consumption tax increase this quarter. But overall, I think this impact will be temporary. Together with the fiscal expansion plan they have, we believe that Japan’s growth rate will be about 1.4 per cent.

But as I mentioned before, so far the growth has been led by public expenditures and currency depreciation. So, it’s important to have more consumption growth as well as investment growth. Recently we see some positive signs. Many large Japanese corporations start to increase wages, and that has a positive implication for the consumption growth. At the same time, many structural reforms the Japanese government announced are very crucial to build up investors’ confidence and investment increase.

I think at this moment, we have to see how quickly the government will implement the structural reforms they committed. Finance Minister Aso visited our headquarters in our Spring Meeting, and he emphasized that many important reforms will start to be implemented from June this year. So, we have a very high expectation that the Japanese government will continue to implement these structural reforms, which is very important to maintain strong growth.

As for China’s growth, you ask me why China’s growth rate is slowing down. I think first of all, you have to expect that one country cannot have a 10 per cent growth rate forever. As the economy’s size increase, it’s more natural that your growth rate will be lowered, actually we call it catch-up effect.

Also, if you look at China’s labor force, the peak of the labor force increase will be actually around this year, and then it will go down. So if you’re thinking about the labor force increase, if you think about the catching-up effect, it’s natural to assume that China’s growth rate will slow down. A 7.5 per cent growth rate is still a lot higher than the growth rate of any other countries in the world.

We have to remember that this year we’re talking about the recovery of the advanced economies. At the same time, when you look at where most of growth is coming from in the world, still it’s Asia and then China is leading with its 7.5 per cent growth rate.

MS. WEEKS-BROWN: New Zealand interest rates.

MR. RHEE: New Zealand interest rate actually is what we have recommended, and we agreed it’s important. Like Hong Kong, recently New Zealand has a real estate boom. In order to have a soft landing on the real estate boom, now they are relying on the tight monetary policy. I think it’s the right policy to do it.

You’re talking about this implication for the increase in interest rate in other regions. Together with the QE tapering, in general we have to expect that the interest rate of the global economy will increase. That, I think, is not necessarily bad news to Asian economies. As I mentioned, many Asian economies need to rein in credit. So, we have to use this time to control our credit.

The increased interest rate itself is not a bad news for many Asian economies. If this is a very disorderly and a very rapid increase of the interest rate, that can cause many problems. But gradual tapering and a gradual interest rate increase, normalization of Asian monetary policy is what we call for.

MS. WEEKS-BROWN: Great. Maybe we’ll take one more question, and perhaps on a topic other than China, just to cover other aspects of the report. The lady in the third row.

QUESTIONER: A quick follow up on the Hong Kong property market. You mentioned about the possible disorderly adjustment of property market. Is this possible in Hong Kong? Also you mentioned about the withdrawal of administrative measures of the Hong Kong government. Do you think it is now the best time for them to do it now? Or if not, then what will be the best time for them to do that?

MR. RHEE: I think it is not’s the time yet. I said that if the QE tapering is accelerating and if there is a disorderly increase in interest rates in global markets, then this can be a risk. But at this moment, I think Hong Kong’s property prices are stabilizing rather than showing rapid decrease, so it’s not time yet for the authorities to start to act. Given your question, I mentioned the possibility; but I think that this moment, the Hong Kong real estate market shows stability, rather than a rapid drop. So, I think it’s not a time yet to be panicked.

MS. WEEKS-BROWN: I think we will wrap up here. Thank you very much for your participation, and look out for future developments in this area. Again, thank you very much and have a good afternoon.


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