Luncheon Address by Christine Lagarde, IMF Managing Director at the China Development Forum 2012 -- Beijing, Sunday, March 18
March 18, 2012Luncheon Address by Christine Lagarde, IMF Managing Director
Beijing, Sunday, March 18, 2012
As prepared for delivery
Good afternoon. It is a tremendous honor to be invited here to the 2012 China Development Forum. I would like to extend my gratitude to the Forum organizers at the Development Research Center of the State Council. I would also like to pay tribute to the Chair for today’s luncheon, Evan Greenberg, and my fellow speaker—and World Bank ‘neighbor’—Sri Mulyani Indrawati.
I am delighted to be back in Beijing. There is a vibrancy and dynamism here that makes one believe that anything is possible. And that is a refreshing change when economic difficulties still loom around the world.
Fortunately, I am visiting in global circumstances that are a little more comfortable than they were last November. Then, I referred to the ‘dark clouds’ over the world economy, but today there are signs that those clouds may be beginning to disperse.
There are signs that strong policy actions—especially in Europe—are making a difference. Financial markets have become a little calmer and recent indicators point to an uptick in real economic activity, mostly in the United States.
Yet, we also need to remain cautious. As Luu Mengzheng said, “Like Weather, one's fortune may change by the evening.”
The global economy is not yet out of the danger zone: financial systems are still fragile; public and private debt is still too high; and unemployment is still a major problem. Added to that, the rising price of oil is a new threat that could derail the recovery.
The advanced economies—the European advanced economies in particular—remain the epicenter of many of these pressures. While they are clearly on the right policy path, they must push ahead without delay or diffidence.
However, the emerging economies—particularly global growth leaders like China—also have a special responsibility.
They are far from immune to the weaknesses among the advanced economies. And the possibility of slower growth over the medium term in some emerging economies is another source of risk to the global recovery.
If the emerging markets are to continue to prosper and help keep the global economy afloat, as they did through the depths of the crisis, they too must act. Not just in their own interests, but in the global interest.
I dare not think how bad the global situation might have been if China was not the powerhouse that it is. Yet, it also makes me wonder what more China can achieve—both for the Chinese people and as a global economic leader. I feel that the best is yet to come.
I would like to offer my perspective on three things:
- First, a brief reflection on China’s spectacular success.
- Second, the immediate challenges for China in navigating the crisis
- Third, and perhaps most importantly, how efforts to reinvigorate reform can ensure China’s continued growth and prosperity.
The Path Recently Travelled
Some 200 years ago, Napoleon Bonaparte said, “China is like a sleeping giant. And when she awakes, she shall astonish the world.”
And the facts are exactly that—astonishing. The Chinese economy achieved a remarkable transformation over the span of three decades to become the world’s second largest economy.
This involved growing by an average of 10 percent a year, and doubling in size every seven to eight years. It also resulted in an 18-fold increase in per capita income during a single generation.
The human scale of the achievement is perhaps even more impressive. The improvements involved one-fifth of the world’s population and several hundred million people being lifted out of poverty.
It is important to recall that these remarkable achievements were not the result of happenstance. They were born out of a vision—a far-sighted strategy to open up the Chinese economy, to develop deeper global trade and investment ties, and to connect with the rest of the world. Hand-in-hand with these concerted reform efforts, were years of hard work by the Chinese people.
With many countries embarking on multi-year reform agendas, the wisdom of China’s approach offers guidance to all of us. While the policy measures will necessarily vary from country to country, the effort behind them must not.
Navigating the Crisis
This brings me to my second point: China’s effectiveness in navigating the global crisis.
When the crisis hit, China demonstrated policy commitment and leadership yet again, deftly combating the negative spillovers. I see three main contributing factors.
- One, China’s economy was in much better shape than most and had the capacity to respond—thanks to sound policymaking in the preceding years. This reflected prudent fiscal policy, countercyclical monetary policy, as well as structural improvements that had helped boost productivity.
- Two, China had so far focused on trade liberalization, deferring financial integration for a later stage in its reform trajectory. As a result, China’s financial system was not exposed to the toxic assets that wreaked havoc on many advanced economies’ financial systems.
- Three, policymakers responded quickly and forcefully, with a stimulus package to offset the shock from the collapse in global demand.
This put China in the enviable position of being able to provide a much needed lifeline to global growth and to assume a greater role as a development partner for low-income countries.
China’s global leadership, commensurate with its economic success, shone through.
And, even though China’s economy is now slowing somewhat, that may not be such a bad thing. The decision to refocus not just on the level of growth, but on the quality of growth and on how it can benefit the entire population—as noted in Premier Wen’s recent report and endorsed by the People’s National Congress—is the right one.
The China Yet to Come
Which brings me to my third and final set of thoughts on China’ future; the China that has yet to come.
The weak global environment has intensified the focus—both inside and outside China—on the need to accelerate efforts to transform China’s economic model.
We have seen important progress on this front. China’s external balance has come down considerably—reflecting weaker global demand, a worsening in China’s terms of trade, and very strong domestic investment. The current account surplus has fallen sharply from a record 10 percent of GDP in 2007 to less than 3 percent in 2011.
Attention is now shifting toward the growing internal imbalances and, notably, the persistent and very high levels of investment. Domestic consumption needs now to assume an even larger role in driving growth. And that needs to happen sooner rather than later or tensions in the current growth path will become increasingly evident.
In this context, I very much welcome that China’s 12th Five Year Plan emphasizes the objective of shifting toward consumption-led growth, a point that Premier Wen recently also underscored.
Why is this important? Export and investment-oriented growth may have catapulted China to where it is today, but it is not sufficiently people-centered. Prosperity can only endure when it is shared more broadly among the Chinese people. And the same is true for social stability.
So, what are the policy priorities needed to propel China forward on this journey? Let me talk about three key dimensions.
- The first is to boost household incomes and promote inclusiveness.
We know that more equal societies are able to achieve greater economic stability and lasting growth. This challenge is by no means unique to China. But the policies to get there must be uniquely home-grown and customized to the local context.
China has made spectacular progress in reducing poverty. But, for years, the income of ordinary Chinese people—albeit fast growing—has made up a smaller and smaller piece of the pie. Household disposable income has fallen as share of GDP from 65 percent in 2000 to less than 60 percent in 2010.
The government is well on track to tackle this issue, already taking steps to expand social safety nets, and allocate more resources to pensions, healthcare and education. Poverty has fallen and rural development is clearly a priority. Yet, inequality is not something that can be rectified overnight. This is a marathon that will require continued action for years to come.
- The second priority is to prepare for the coming demographic challenge.
We have seen through the experiences of many advanced economies, just how costly an aging population can be when the changing needs are left unaddressed.
China’s demographic shift may be several years away, but it should heed this experience. The coming changes are so large that it would be wise to begin preparations today. The share of working age population will start to decline 4-5 years from now, and could fall by 10 percent over just the following 20 years. This will require sweeping changes. Efforts to strengthen healthcare and pension systems will be a key factor.
Equally important will be efforts to enhance productivity and innovation to help prepare for the time when the labor force finally begins to shrink. The government can help lay the foundations by improving labor mobility and investing in human capital, for example, through better education and equal benefits for migrant workers.
And actions to increase competition—particularly in the service sector—will also help the private sector play a role, including in creating more jobs.
- The third, and final, priority is financial reform.
The ultimate goal should be to ensure that China’s financial system works to support, not destabilize, growth. It should be open and innovative. It should ensure that everyone has access to credit to help boost consumption, support smaller enterprises, and create jobs. Risks must be scrutinized and managed, so as not to threaten financial stability.
I cannot do justice here to the gamut of financial reforms needed to underpin this transformation of China’s financial system.
So let me sketch out the core elements of a broad roadmap: a stronger and more flexible exchange rate; more effective liquidity and monetary management; high quality supervision and regulation; more well developed financial markets and products; flexible deposit and lending rates, and finally opening up the capital account.
Against this backdrop, I see no reason for the renminbi not to reach the status of an international reserve currency and occupy a position on par with China’s economic size.
The growing footprint of China’s economic progress and global influence is unmistakable.
China’s increasing role in the IMF—as one of our largest shareholders—is a testament to that growing leadership. And each day, I am reminded of the depths of China’s talents working closely with my IMF management colleague, Min Zhu, and other senior Chinese nationals at the IMF.
As other countries are struggling to overcome the crisis and get back on a solid growth path, China stands as a symbol of what can be accomplished.
This Forum is an opportunity to celebrate China’s progress and applaud the many good policy actions behind that progress. And, as we look ahead, the actions and policies underway today provide the key to a more prosperous future for China.
“If you want to know your past - look into your present conditions. If you want to know your future - look into your present actions.” ~ Chinese Proverb
So, I am hopeful that current plans for far-reaching policies and reforms will secure Chinese prosperity and leadership for the years ahead.