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Statement by Mr. Xiao Gang
Deputy Governor of
The People's Bank of China and
Alternate Governor of the Fund for China

International Monetary and Financial Committee
April 16, 2000

List of IMFC Statements

At the outset, I would like to congratulate Mr. Horst Köhler and wish him every success in his role as Managing Director of the Fund. At the same time I would also like to thank Mr. Michel Camdessus for his great contribution to the Fund during his thirteen-year tenure.

I.  World Economy and policy challenges

1.  We are pleased that the world economic and financial situations have improved significantly since last year. Although the impact of the recent financial crises may be felt for some time, most of the emerging market economies in Asia posted V shaped economic recovery; the Latin American and transition countries also successfully came out of their difficulties and demonstrated strong signs of recovery; the Russian economy registered a positive growth rate; and the African and Middle East economies recovered steadily. Meanwhile, the economy of the United States continued to grow robustly, the euro area boosted its pace of recovery, while, since the beginning of the year, Japan has signaled out positive signs of reversing its downward trend. These indicate that the world economy is to grow at a higher rate in 2000.

2.  With broadly improved prospects for the medium-term global economy, we believe the challenge facing policymakers is how to balance the need to maintain the momentum of economic recovery and growth with the need to prevent a pick up in inflation. Policymakers in the major industrial countries should give adequate consideration to the potential impact of their policies on the recovery of the emerging and developing economies. The timing and extent of macroeconomic tightening in these countries should be managed in such a way that its negative side and spillover effect on the recovery of the emerging and developing economies and on the stability of the world economy can be avoided.

3.  As economic globalization intensifies, imbalances have continued to occur in the economic development of different countries and regions. Since the early 1990s, the share of the developing countries, as a group, in world GDP and foreign trade has constantly declined. To ensure that all countries benefit equally from globalization, a fair foreign trade and world economic system should be established. Not only should the liberalization of commodity trade and capital transactions be promoted and pursued, but also the free movement of labor and the transfer of technology. The advanced countries should strengthen their macroeconomic coordination, maintain a reasonable stability of exchange rates among the major currencies, increase the transfer of funds and technology to the developing countries, especially to the poorest ones, and open their markets to the latter.

4.  Poverty alleviation is a daunting task facing the global economy. In this respect, the developed countries should make more substantial contributions. China is a developing country with large numbers of people still living in poverty. We are now implementing the Great Western Development Project, and making every effort to improve living standards in the underdeveloped areas. We believe this is our best contribution to alleviation of world poverty.

II.  On The Imf's Role In The Global Economy

A.  The Role of the Fund

5.  It is our view that the Fund has played an important role in resolving financial crises and its unique role is irreplaceable.

6.  We support the idea that the Fund should adjust its scope of business proactively in response to changing circumstances. However, we believe the Fund should focus more on its original mandate, i.e., facilitating the macroeconomic stability of its members and the stability of the world monetary system, as a whole, providing financial support to its members as the lender of last resort whenever they experience balance of payment difficulties. It is also necessary to consider increasing the SDR allocation to meet members' needs in adjusting their balance of payments when global liquidity is inadequate. The Fund should establish a relatively clear-cut division of labor and responsibility with the World Bank, the Bank for International Settlements (BIS), and other international institutions so that overlapped functions can be avoided and resources better utilized. We wish to emphasize that the task of developing standards and codes for the banking sector and supervising their implementation should continue to be the core function of the BIS, and the World Bank should focus on economic development and poverty reduction. Such an arrangement with unambiguously defined mandates and subsequent specialization and cooperation among these institutions will undoubtedly improve their efficiency and allow them to actively play their respective roles.

B.  Review of Fund Facilities—Next Steps

7.  In light of changing circumstances, we welcome and support the review of the Fund facilities. However, caution must be exercised in recognizing the heterogeneity of the needs of its members and the one-size-for-all approach should be avoided.

8.  We are of the belief that the critical issue hinging on Fund facilities is the rationality and suitability of its lending conditionality. We hope the Fund will pay more attention to the specific features of its members' political, economic, and social dimensions and those conditionalities that are not realistic should not be imposed unilaterally while preparing the programs.

9.  On reclassification of the Fund facilities, we think that as long as the perceived target of the Fund facility is clearly defined, it is practical to abolish those overlapping and inactive facilities. Experience has shown that conditionality for the CCL is unrealistically restrictive, consequently, its perceived role has not been realized. We would like to suggest that the CCL be consolidated with other precautionary arrangements to retain the best parts of both, i.e., higher access limit of the CCL, and reasonable conditionality, convenient disbursement and affordable interest charges. It is our hope that this new facility will give members an incentive to avert financial crises. More specifically, we think disbursement for the CCL can be made simpler. No additional conditions should be attached to the first disbursement, the amount of the first disbursement should be decided in a flexible manner to accommodate the member's need, and no fixed amount should be imposed.

10.  We categorically oppose any attempt to raise the interest rate for Fund facilities and believe that the terms and interest rate of the Fund facilities should not be made a scapegoat for the failure of Fund programs, which largely result from their unrealistic conditionalities. We support the continuation of the EFF.

11.  Currently, most of the poor countries have no access to the international capital markets and emerging economies also have difficulty in accessing the capital markets; the situation is even worse during financial crises. Against this background, Fund arrangements should ensure those members' access to Fund resources and the role of the Fund in resolving its members' balance of payment difficulties and in preventing and rescuing financial crisis-affected economies should not be undermined.

12.  We oppose automatically linking the observance of standards and codes to the conditionality of any Fund facility. The observance of the standards and codes should be on a voluntary basis and be carried out in a gradual manner. The direct link between these two issues is no different from declaring them de facto compulsory, which may just produce an unwanted outcome.

C.  Safeguarding Fund Resources

13.  Up until now, there has been no serious problem with members misreporting to the Fund, and the incidents of intentional misreporting have been very rare. Misreporting should be classified unambiguously into intentional and unintentional, and different approaches should be established accordingly. For those unintentional misreporters, the Fund should provide advice and technical assistance to improve the quality of statistics and reporting rather than simply resorting to penalizing measures.

14.  With regard to the prevention of misreporting incidents, we think the Fund's existing legal framework is generally appropriate, and so far no fundamental weaknesses can be identified. To further safeguard Fund resources, we can broadly go along with the suggestion that information regarding prior actions for use of the Fund resources by its members be included in the Misreporting Guidelines, but no further action can be justified. Considering the fact that data standards and capability of data provisioning vary across member countries, the expansion of the coverage of Article VIII, Section 5 should not be considered. We are not in favor of the possible lengthening of the current two-year limitation period under the Misreporting Guidelines.

15.  Extreme caution should be exercised with regard to the publication of misreporting cases. To publish all the cases in the same way, without giving any consideration to the circumstances, would be no help for the member's ex post corrective actions and the impact both on the market and the misreporting member could be rather negative.

16.  The Fund is a multilateral governmental cooperative institution. It is the founding principle that the Fund should respect the sovereign rights of its member countries and trust in the governments of its members. It is desirable that the Fund provide policy advice and technical assistance to its member central banks so that they can improve their internal management and control systems. However, direct audit or assessment by the Fund would be seen as inappropriate.

D.  Review of Surveillance: Links between Surveillance and Standards/Codes

Fund Surveillance

17.  We have noted that the Fund has intensified its surveillance efforts since the advent of the Asian financial crises. We support a more important role for the Fund in safeguarding the stability of the world economy through its surveillance exercises, and welcome the efforts of the Fund staff in this direction.

18.  The Fund should focus its attention on developing standards in its core areas such as macroeconomic policy and balance of payments and improving surveillance on their implementation. Particularly, the Fund should play a greater role in preventing and resolving crises. With regard to its non-core business, the Fund should follow the lead of other international institutions which by their mandates, establish relevant standards and are subsequently responsible for their supervision. The Fund should refrain from being over involved in these areas .

19.  We think that the major industrial economies have systemic significance, therefore, the Fund should put more effort into monitoring these members under its bilateral and multilateral surveillance exercise, particularly, by analyzing the possible impact or spillover effect of their policies on both regional and global economies. As for the developing and emerging economies, if they are deemed to have systemic significance, and if more surveillance and policy requirements are needed, their representation should be reflected accordingly at the Fund, to strike a balance between their rights and obligations.

Financial Sector Stability Assessment (FSSA)

20.  We would like to mention the following three points. First, up to now, only a handful of countries have participated in the FSSA; its outcome and effectiveness need to be observed. In our opinion, the enhanced pilot project will start only after a full-scale post-evaluation has been completed. The major industrial countries should also be included in the pilot project. Participation should be voluntary. Second, the assessment should comply with local laws and policies. Third, it is not appropriate to publish Financial Sector Assessment Program (FSAP) reports, not even on a voluntary basis. By publishing these reports, the voluntary countries exert pressure on those who remain unwilling to do so. In addition, the possibility of discrete publication by a country might create speculation and cause volatility in the markets. Fourth, because of the confidential and sensitive nature of the assessment, no outside consultant should be involved. Finally the FSAP should not be included in the Article IV consultation.


21.  The SDDS has kept changing since it was launched, which implies that the SDDS itself is far from mature. We think that as a standard system, the SDDS should remain stable. Otherwise, it will not only put more pressure on the already stretched resources of the participating members, but also frighten those members who may be willing to join. We oppose making observance of SDDS a precondition for application to the CCL. This has made the SDDS a de facto compulsory standard rather than a voluntary one as the Fund now claims.

E.  Private Sector Involvement

22.  In involving the private sector in the prevention and resolution of financial crises, market orientation and profit seeking nature of the private sector should be given due consideration. Governments should expeditiously establish clear rules for the private sector's involvement, and create a favorable framework and environment. These rules should be totally transparent.

23.  Since large scale disorderly capital flow is an important cause of financial crises, the activity of the private sector in the international financial market should be more transparent. More effort should be made to enhance the disclosure of cross-border capital flow and to strengthen supervision of the private sector, particularly the highly leveraged institutions. It is our great concern that progress in this area has been far from sufficient and we urge the Fund to make a greater effort on this issue.

24.  In principle, we support the inclusion of collective action clauses in debt instruments. However, to date, a practical and effective way has yet to be found to implement these clauses. In anticipation of higher transaction costs and their negative effect on growth in the long run, we are not in favor of the involuntary inclusion of these clauses .

25.  We believe that creditor committees can play a positive role in both debt repayment, rescheduling and restructuring.

III.  Progress on the HIPC Initiative and
Poverty Reduction and Growth Strategies

26.  We are pleased to note that certain progress has been made in implementing the HIPC Initiative and Poverty Reduction and Growth Facility program under the auspices of the demonstrated efforts of the Fund, the World Bank, and others since the last Annual Meetings.

27.  We support the enhanced HIPC Initiatives of the Fund and wish to underscore its ultimate goal of poverty reduction. We think combining debt relief and poverty reduction should not result in stricter conditionalities for HIPC debt relief, but should ensure poverty reduction and a sustained economic growth for the HIPC countries. Therefore, in addition to debt relief initiatives, the developed countries should provide extra official assistance funds for poverty reduction program to the HIPC countries.

28.  We believe the Poverty Reduction Strategy Papers (PRSPs) will help the low-income developing members improve the efficient use of their resources and provide guidance in putting the poverty reduction plan in place. However, the PRSPs are a country-oriented product, and the country involved should make independent decisions and therefore has its own ownership. The Fund and the World Bank are encouraged to listen to suggestions and comments from the developing countries to better understand and resolve problems emerging from the PRSPs preparation process. The division of labor between the Fund and the World Bank should be further clarified in this regard.