2002 Annual Meetings of the IMF and the World Bank Group
September 28, 2002
Documents Related to September 28, 2002 IMFC Meeting
People's Republic of China and the IMF
Statement by Mr. Dai Xianglong
Governor of the People's Bank of China
International Monetary and Financial Committee
Washington, D.C., September 28, 2002
I. The Global Economy and Financial Markets—Outlook, Risks, and Policy Responses
Since April the global economic recovery has slowed with increasing uncertainties. Nevertheless, in general, the world economy has emerged from the stagnation and downturn of late-2001 and entered a period of slow adjustment and recovery.
The U.S. economy is recovering at a much slower pace than anticipated earlier this year as a result of weak consumer confidence, halting investment and large stock market fluctuations triggered by a series of corporate governance and financial scandals. In Europe, domestic demand has been growing slowly. The appreciation of the euro has weakened the role external demand could play in boosting recovery. On the other hand, due to slow structural adjustments, an appreciated euro has failed to alleviate inflation pressures significantly, restraining further macroeconomic stimulus. A clear recovery is not expected to be underway in the euro area until late this year or early 2003. There have been encouraging signs of recovery in the Japanese economy compared with the beginning of the year. However, domestic demand in Japan remains sluggish, and structural reforms still have a long way to go. Emerging markets in Asia have maintained relatively strong growth while the unstable economic and financial situation in Latin America in the wake of the Argentine crisis has severely affected economic prospects in the region. Supported by growth in domestic demand and exports, transition economies in Central and Eastern Europe and countries of the Commonwealth of Independent States have maintained a steady growth momentum. African countries have made some progress in correcting their macroeconomic imbalances, but their growth is retarded by weak demand in world markets.
The global economic recovery now faces several major risks. First, recovery in the United States, Europe and Japan is weak. It is crucial that these countries coordinate their policies and take effective pro-recovery measures to prevent global economic stagnation. On the other hand, while low inflation in the major economies provides some room for macroeconomic policy adjustment, the risk of a global deflation cannot be overlooked. Second, the current account imbalances of some major developed countries may lead to abrupt movements in the exchange rates of the major currencies. Such movements will not only put the developed countries themselves in a difficult situation in the short run but will also create tremendous external risks for the developing countries. Third, investor uncertainty about companies' actual profitability is a major factor affecting market confidence and its healthy development. If investor sentiment does not improve, the markets will become even more volatile, directly affecting the growth of consumer demand and economic recovery. Fourth, if the financial crises in Latin America are not effectively contained, they may spread further to other emerging market economies. Fifth, further increases in oil prices due to tension in the Middle East may hamper global economic recovery.
In light of the above risks, we call on the developed countries to maintain their current supportive monetary policy stance. Should growth continue to slow, expansionary fiscal policies may be considered. At the same time, measures should be taken to strengthen corporate governance together with accounting and auditing practices, with a view to rebuilding investor confidence. The regulation and supervision of major financial centers should also be enhanced with available precautionary measures to address the exceptional circumstances of individual institutions. The significant current account imbalances of the major economies should be corrected. However, a gradual adjustment is desirable to avoid large fluctuations in capital flows and exchange rates.
The Fund should take a more active role in assisting member countries to overcome their difficulties in preventing crisis contagion. We hope that the Fund will reach an agreement with the Argentine authorities as soon as possible to help them address their current difficulties. At the same time, the Fund should urge the developed countries to further open their markets and increase official development assistance and technology transfer to developing countries. The developing countries should take full advantage of the opportunities brought about by economic globalization while taking account of their own circumstances. By fostering their own strengths in international cooperation and competition, the economic development of the developing countries could be accelerated.
II. Economic Development and Policies in China
China has witnessed a good overall economic performance since the beginning of this year. GDP grew by 7.8 percent over the same period last year. By end-August total retail sales increased by 8.6 percent while fixed asset investment rose by 24.2 percent. Prices declined at a slower pace with the consumer price index falling by 0.8 percent. Exports and imports increased by 17.5 percent and 14.5 percent, respectively. Foreign direct investment grew by 25.5 percent to US$34.4 billion. Foreign exchange reserves reached US$253 billion. While closely monitoring developments at home and abroad, the Chinese government continues to pursue proactive fiscal policies and sound monetary policies to ensure the sustained and rapid growth of the national economy.
With new challenges following accession to the WTO, the Chinese government has revised the relevant laws and regulations. Reforms have been accelerated, particularly in the banking and SOE sectors. Additional progress has been made in various areas--reducing banks' NPLs, transforming the operational mechanisms of the SOEs, reforming the tax regime, improving the social safety net, ensuring the healthy development of both the public and private sectors and facilitating labor mobility. The Chinese government places great emphasis on good corporate governance together with the accounting and auditing systems, and has taken steps to introduce the relevant standards and rules in line with international practices. In particular, the major state commercial banks have made substantial progress in improving their accounting rules and enhancing their public information disclosure. The Chinese government attaches great importance to statistics. China's participation in the GDDS highlighted an impressive statistical achievement.
As an international financial center, Hong Kong Special Administrative Region (Hong Kong SAR) has sound economic fundamentals and enjoys the benefits of the Mainland's huge market. Against this background, we are strongly convinced that, led by its authorities, Hong Kong SAR will successfully overcome the temporary difficulties arising from the prevailing weakness of the global economy, and its vigor and vitality will be restored.
The authorities of Macao Special Administrative Region (Macao SAR) have taken firm steps to maintain social stability and promote economic development since China resumed its exercise of sovereignty. Macao SAR now enjoys a more dynamic economy and a promising future. As the past several years' experience has proved, the principle of "One Country, Two Systems" has been a success in Hong Kong SAR and Macao SAR.
III. The Fund and the International Financial system in the Process of Reform
a. Enhancing Surveillance
Through its surveillance, the Fund plays an important role in safeguarding international monetary and financial stability. It is encouraging to note that the Fund has further enhanced its surveillance of global financial markets since the beginning of the year. The quarterly Global Financial Stability Report has helped to improve the timeliness of Fund surveillance, and provided member countries with valuable information to assist in the formulation of macroeconomic policies and analysis of the major global economic issues in an increasingly integrated global financial network. We commend and support the Fund's efforts in this area. At the same time we hope that, with close coordination and clear focus on the roles of the World Economic Outlook and the Global Financial Stability Report—the two major global surveillance tools—the Fund's multilateral surveillance will be more effective. At present, the Fund should strengthen its surveillance of the major industrial countries and important financial centers with a view to preventing large fluctuations among the major currencies, effectively monitoring international capital movements, ensuring the sound and efficient operation of international financial markets and promoting the healthy development of the world economy.
With rapid economic globalization, it is essential to have internationally accepted standards and codes in place. When setting these up, not only should we draw upon the general patterns observed in global economic development, but also pay due regard to the specific issues facing countries in their different stages of development. We should take account of the specific circumstances and needs of the developing countries. Their voices should be adequately heard. On implementation of the standards and codes, we emphasize that this process should always advance step by step and on a voluntary basis. Any standard is subject to the test of practice and needs to improve over time. The recent corporate scandals in some developed countries have once again demonstrated that good corporate governance and transparency deserve serious attention and sustained efforts from the public and private sectors of both the developed and developing countries.
b. Crisis Prevention and Resolution
A fair and effective sovereign debt restructuring mechanism (SDRM) plays an important role in crisis prevention and resolution. Establishing such a mechanism is in the immediate interests of all countries. We welcome the discussions on the approaches to sovereign debt restructuring and appreciate the efforts and progress the Fund has made since its Spring Meetings. The proposed SDRM provides a new way to address sovereign debt problems but is still in the initial stages of discussion. The Fund needs to look carefully into the various aspects of this issue and listen to opinions from all sides. We believe that, as far as sovereign debt restructuring is concerned, the statutory and contractual approaches complement each other. We support the Fund's continued efforts to examine the two approaches and analyze their feasibility. Domestic debt and official bilateral debt should not be included in the SDRM. Whichever approach is to be adopted, sovereign decisions should be respected. Compulsory implementation is not appropriate.
On the statutory approach, it is important that the proposed Sovereign Debt Dispute Resolution Forum be independent and impartial, its members diversified and competent with adequate representation from developing countries ensured. We need further specifications and clarification on the Forum's operational mechanism, the rules governing the selection of its members as well as its relationship with the Fund. A full consensus on the design of the mechanism is needed to make it operationally feasible. All these issues require the Fund to conduct a more thorough study and to carefully consider the practicability of amending its Articles of Agreement.
The principle of voluntary implementation should be fully reflected in the contractual approach. The disadvantages of enforcing a contract-based framework in the form of Fund conditionality may outweigh its advantages. Nor is such an approach necessarily practicable. In addition, it is not clear how the markets will react to the introduction of collective action clauses. If such a practice gives rise to higher long-term financing cost of the developing countries, it will become less plausible. The conversion of existing debts to new debts with collective action clauses is likely to pose an additional burden for the developing countries, and therefore warrants further examination.
c. HIPC Initiative and Poverty Reduction Strategy Papers
Poverty and unbalanced development are the sources of many problems. Only if importance is attached to resolving these problems can sustained peace and development be achieved in the world. We support the Fund's work in poverty reduction, and urge the Fund to continue its efforts to reduce the debt burden of the least developed countries. Developed countries should assume major responsibility in this process. We hope the Fund and the Bank can further streamline their procedures and fully respect ownership of recipient countries, so as to bring the initiatives of the authorities and people of these countries into full play. Poverty reduction is an arduous long-term task. While providing financial and technical assistance, the international community should be fully aware of the constraints faced by the poor countries in such areas as infrastructure and institutional capacity, and avoid posing unrealistic requirements on them. Such requirements could hamper progress in the work of poverty reduction and increase the burden of these poor countries. The Fund should implement vigorously the initiatives in the Monterrey Consensus, and urge developed countries to reach the ODA target of 0.7 percent of GNP as soon as possible and to open their markets to all developing countries.
China is still a low-income developing country with thirty million people living below the poverty line. While striving to reduce its own poverty with international support, China will as always actively support and participate in the poverty reduction efforts of the international community, by providing assistance on both bilateral and multilateral basis within its capacity.
d. Combating Money Laundering and the Financing of Terrorism (AML/CFT)
The Chinese government firmly supports and implements the resolutions of the U.N. Security Council on combating the financing of terrorism. China has ratified ten international treaties on anti-terrorism and recently signed another one. It has also established special units to deal with AML/CFT issues, and drafted relevant laws and regulations. In addition, China actively participates in AML/CFT international cooperation and would like to work with the Financial Action Task Force on Money Laundering (FATF). We urge the FATF to enlarge its membership, increasing the representation of developing countries in order to enhance the appropriateness and authority of its recommendations.
We believe that national authorities under the leadership of the United Nations should carry out work on AML/CFT. The Fund and the Bank should direct their AML/CFT efforts to areas where they have mandates, as prescribed in their Articles of Agreement. The Fund has made significant progress in AML/CFT since the Spring IMFC Meeting. We welcome the progress the staff has made in drafting the comprehensive AML/CFT assessment methodology. We emphasize that AML/CFT assessments should faithfully follow the unified, voluntary and cooperative approach of the ROSC process. While the FATF is invited to participate in the assessments, it should forego its "name and shame" practice in the ROSC assessments. The Fund/Bank-led assessments should not include aspects of law enforcement. Assessment duplication should be avoided. Only Fund and Bank staff should be allowed to conduct assessments of their members. We support the use of Fund technical assistance to help member countries improve their AML/CFT capacity. We hope that the AML/CFT assessments and follow-up technical assistance will not compromise the Fund's core
functions and traditional technical assistance. In carrying out the work plan on AML/CFT, the Fund and Bank should respect the sovereignty of member countries and take account of their specific situations. At the same time, the ownership and initiatives of national governments should be brought into full play.
IV. Other Issues
a. The Twelfth General Review of Quotas and the Revision of Quota Formulas
With accelerated global economic and financial integration, highly volatile capital movements and frequent financial crises, the Fund's role in crisis prevention and resolution has become increasingly important, requiring the Fund to be equipped with sufficient resources to deal with such emergencies. However, the relative size of the Fund's quotas has decreased to its lowest level in nearly 30 years and we cannot preclude a possible liquidity shortage. Therefore, to ensure the Fund's core role in safeguarding the stability of the international monetary system, it is most necessary to make a decision on quota increase during the Twelfth General Review of Quotas. Furthermore, work on revising quota formulas should conclude soon with the appropriate reflection of changes in member countries' relative positions in the world economy. This process should reflect the rapid development of the developing countries. The under-representation of Asian countries should be corrected. In the meantime, an increase in the representation of African countries is fully justified.
b. Streamlining Conditionality and Enhancing Ownership
We support the Fund's efforts to streamline conditionality and enhance the ownership of member countries, commend the progress it has made in these areas and welcome the new Guidelines on Conditionality. These guidelines will help further streamline conditionality, sharpen the focus of programs and allow member countries to formulate adjustment policies more flexibly and independently. We look forward to firm implementation of the guidelines in future programs and emphasize the timely review of the outcome of programs and the continuous process of learning from experience.
c. Independent Evaluation Office
Since its establishment, significant progress has been seen in the work of the Independent Evaluation Office (IEO). We welcome the approach the IEO has adopted in conducting its work characterized by its independent operation and broad input. The first three evaluation projects are closely related to the Fund's core areas of responsibilities and current work priorities. We believe that the IEO's work will help enhance the effectiveness of the Fund's operations.