China and the Global Economy: Creating New Ingredients for Growth
IMF News, March 20, 2015
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- Authors: Christine Lagarde Managing Director
- Published: March 20, 2015
Introduction
- Speech by Christine Lagarde, Managing Director, International Monetary Fund, Fudan University, Shanghai, March 20, 2015. As Prepared for Delivery.
- Framing metaphor: running an economy is akin to brewing an exquisite cup of Chinese tea — requiring impeccable timing and a delicate mix of ingredients.
- Three topics addressed:
- What are the ingredients for global growth?
- What are the ingredients for China’s economic growth?
- What are the ingredients for your own success?
Ingredients for global growth
- Current global context and risks:
- More than six years after the start of the global financial crisis, the world still faces high debt and high unemployment.
- IMF recently cut its global growth forecasts for 2015 and 2016 to 3.5% and 3.7%, respectively.
- Significant risks include:
- Asynchronous monetary policy (expected U.S. tightening while most other countries ease) that may trigger excessive volatility in global financial markets.
- Strengthening U.S. dollar affecting emerging market economies with increased dollar borrowing by banks and companies over the past five years.
- Prolonged low growth and low inflation in Japan and the Euro Area, though signs of improvement in Euro Area activity and inflation expectations are emerging.
- Policy recipe:
- Need for a more powerful policy mix centered on greater structural reform in all countries, including China.
- Recommended measures:
- Ramp up public investment to expand or fix vital infrastructure.
- Step up trade liberalization.
- Press ahead with reforms in education, health, social safety nets, and labor and product markets.
- Unleash the economic potential of women excluded from the labor market.
- G-20 growth strategy:
- Expected to add more than US$2 trillion to the global economy and create millions of new jobs over the next four years.
- Implementation is required on a country-by-country, reform-by-reform basis.
- Channels linking global conditions and China:
- Stronger U.S. growth benefits Chinese exports.
- Cheaper oil raises China’s private demand and consumer purchasing power.
- Weak demand in other emerging markets and the Euro Area (China’s largest trading partner) is a downside.
- China has contributed more than a third of global growth over the past seven years.
Ingredients for China’s economic growth
- Main challenge:
- Avoiding the “middle-income trap”; China aims to become a high-income country by 2030.
- Premier Li Keqiang: “Systemic, institutional, and structural problems have become ‘tigers in the road’ holding up development.”
- Growth outlook and rebalancing:
- IMF forecasts GDP growth of 6.8 percent in 2015 — about half a percentage point less than last year.
- A “new normal” of slower, safer, and more sustainable growth is desirable.
- Rebalancing underway:
- From investment to consumption.
- From manufacturing to services.
- From capital-intensive growth to innovation, higher skills, and technology.
- Policy and reform priorities:
- Preserve economic and financial stability to allow safe adjustments (example: credit growth has slowed in the past 12 months).
- Advance market-oriented reforms in the Third Plenum blueprint, with emphasis on opening up the service sector.
- Remove barriers for private companies in finance, education, health, telecom, and logistics to boost employment, consumption, and living standards.
- Shanghai and the Shanghai Pilot Free Trade Zone cited as leading examples of service-sector liberalization and business innovation.
- Financial sector modernization:
- Liberalized lending rates and more flexible deposit rates.
- Encourage private investors to establish small and medium-sized banks and other financial institutions.
- Further steps needed: liberalize deposit rates and the exchange rate; remove implicit government guarantees (especially for state-owned enterprises); develop greater tolerance for corporate defaults and bankruptcies.
- Overarching principle: allow market forces to work more to deliver safer, higher-quality growth.
- Sustainability and inclusion:
- Environmental challenges:
- Air pollution, water pollution, and soil contamination are major challenges and harmful to health and growth.
- China is stepping up green policies: cracking down on industrial pollution, innovating in renewable energy, recently raised gasoline taxes, and is considering an environmental protection tax.
- Income inequality:
- China has lifted more than 600 million people out of poverty over the past three decades.
- Disparities persist between rural and urban, coastal and inland, and within cities and rural areas.
- IMF studies: excessive income inequality leads to slower and less sustainable growth.
- Policies to reduce inequality: strengthen social safety nets; improve access to education, health care, and financial services; employ smart redistributive policies including more progressive taxation.
- Gender inequality:
- Women account for 45 percent of China’s labor force.
- Women make up only 25 percent of people in “positions of responsibility,” according to census figures.
- Addressing constraints (particularly in rural areas) will raise growth; IMF studies show greater gender equity leads to higher, more sustainable growth.
Ingredients for your success (targeted to students and future leaders)
- Opportunities and sectors:
- Biotech, green technologies, cutting-edge information systems, smartphone apps, film, music, video games, and other creative industries.
- Some 80 per cent of the world’s adult population is expected to own a smartphone by 2020 — an opportunity for Chinese firms.
- Skills and global outlook:
- Necessity of travel, foreign languages, overseas studies, and cross-border cooperation in science and product innovation to create products and services for global customers.
- Emphasize mutual trust and strong ethical behavior as foundations for sustainable ventures.
- Attitude toward failure:
- Encourage trial and error; perseverance; “Dare to ask where the road is; the road is beneath your feet.”
- IMF as a career path:
- Invitation to consider joining the IMF.
- Current Chinese presence at the IMF:
- 140 Chinese nationals working at the IMF.
- 8 graduates of Fudan University among them.
- IMF represents 188 member countries; Deputy Managing Director Min Zhu (a graduate of Fudan University) and Jianhai Lin (Director of the department that supports the IMF Executive Board) cited.
Conclusion and outlook
- China has transformed dramatically over the past three decades and is poised to provide global economic leadership in coming decades.
- The next generation is framed as “the most important ingredients” for China’s future.
- Collective call to action: nurture global cooperation and national reforms “day after day” to achieve slower, safer, and more sustainable growth that benefits China and the world.
- Additional high-net-worth statistic:
- China is now home to 190 billionaires and more than two million millionaires, ranking just below the United States in high-net-worth individuals.
China and the Global Economy: Creating New Ingredients for Growth, by Christine Lagarde, Managing Director, International Monetary Fund, Fudan University, Shanghai, March 20, 2015. As Prepared for Delivery.