Speech

Ensuring a Sustainable Global Recovery

January 15, 2018

IMF First Deputy Managing Director David Lipton

Asian Financial Forum, Hong Kong

As Prepared for Delivery

Ladies and gentlemen,

Thank you for your kind welcome to Hong Kong. I am honored to speak at the opening of this conference.

I would like to offer an overview of the outlook for the global economy and the Asia-Pacific region. And since the fortunes of both are so closely linked to China, I will also outline some key policy challenges facing Beijing.

Let’s start with the big picture. The IMF will issue an update to our World Economic Outlook next week. The bottom line is that the cyclical recovery in the global economy is going from strength to strength. The signs point to faster growth across all regions.

That said, we must also recognize that the global economy is in a late stage of the long and gradual recovery from the global financial crisis. With economic slack in advanced economies diminishing, it is not clear how long the good news will continue. 

That is why the IMF’s Managing Director, Christine Lagarde, has been saying that the time to fix the roof is when the sun is shining. Our meaning is clear: now is the time to address vulnerabilities and structural issues that could impede sustained growth, and to take steps to enable stronger growth once cyclical recovery is no longer driving the economy.

Investment and Trade Rise

Right now, the sun is shining on the global economy. Capital-intensive investment and consumer demand are rising.  Because investment is import intensive, that is lifting world trade at a rate well above GDP growth, which helps spread recovery more broadly across the globe. Unemployment in many advanced economies is falling. Inflation remains subdued even though the major central banks continue to pursue the accommodative monetary policies.

European growth is not only rebounding, it is more evenly distributed than in many years. The U.S. is experiencing a rebound that should receive an additional, short-term lift from tax reform.

Asia contributes two-thirds of global growth. With strong consumption and investment, rising exports, and steady capital inflows, the outlook for the region remains bright.

China alone is providing one-third of global growth. Japan has been growing above potential for several quarters. The Korean economy has held up well despite the tensions on the peninsula. India is reclaiming its place as a growth leader after a short slowdown. And the ASEAN-5 have gained momentum in response to higher investment and increased exports.

Challenges and Risks

That is all good news.  But there are challenges and risks on the horizon.  First, the rapid appreciation of asset valuations over the past year should heighten our concern about potential financial market vulnerabilities.

Second, there is also the risk of unexpected monetary policy and exchange rate developments that prompt a change in capital market sentiment—and thus a sudden reversal of capital flows.

Third, geopolitical tensions have risen, raising the possibilities for protectionist action or for overt security conflicts. 

Fourth, a cloud hangs over the global economy’s medium-term growth prospects.  Wage growth remains weak in many advanced economies, and productivity growth is lagging. This reflects limited progress on the part of both advanced and emerging market countries on the structural reforms that could lift potential growth and, ultimately, living standards. Many countries, including here in Asia, will have to navigate reforms while also coping with the challenge of aging populations.

And lastly, let me point out that there is a significant portion of the global economy that is not participating in the recovery. Some oil and commodity exporters continue to feel the effects of low prices—even as they rebound.  Looking forward, our medium-term projections foresee that more than 40 countries, including some major emerging market countries, will grow more slowly than advanced countries.

Thus, they will not resume the trend of catching up in living standards. In fact, many will fall further behind.

Worse yet, some developing countries seem likely—once again—to face difficulties from the burden of rising indebtedness.

China’s Global Role

This evaluation of global growth and risks leads us inevitably to China. I will join the panel on China, so allow me to offer just a few general observations.

The Chinese success story is deeply entwined with the fortunes of the global economy. As a trading nation, China is a key partner for over 100 countries: countries that represent 80 percent of global GDP. It is the hub of global supply chains, a magnet for commodity exporters, and a source of final demand.

It is a pacesetter for digital commerce, outweighing other countries in terms of online retailing and payments—and playing a leading role in the development of fintech, robotics and artificial intelligence.

Then there is investor and creditor China—playing an increasingly important role in development aid and infrastructure finance, as epitomized by the Belt and Road Initiative. One number: Chinese lending represents 25 to 30 percent of GDP in some recipient countries.

Finally, multilateral China. It is the largest shareholder in AIIB, and the third-largest in the IMF. The renminbi has joined the SDR basket of currencies. It is safe to predict that Beijing’s role in international institutions will continue to expand in the coming years.

China’s Key Challenge

The key challenge now for China is to ensure that its role generating growth and financing remains on a path that benefits the global economy—and itself. We can ill afford a world preoccupied with uncertainty about China’s future.

At home, China has a window of opportunity to accelerate economic reforms that can secure sustainable and inclusive growth. We see two core policy objectives:

• First, to push further the policies that have been rebalancing growth toward consumption, with a stronger role for private businesses. This calls for less public—and more private—investment; a progressive tax system; continued rationalization of state enterprises; and more spending on health, education, and the poor.

• Second, to safeguard financial stability. This means a continued effort to rein in credit growth, and to tighten oversight of some lending practices. China has made considerable progress in this area, as our recent assessment of its financial sector shows. But it is essential to sustain this effort to ensure that financial instability does not undermine the country’s extraordinary economic and social progress.

In terms of its global role, China has been a voice of reason in the debate over trade and economic integration. This support for globalization—proclaimed a year ago, by President Xi Jinping at Davos—is constructive and valuable, especially at a time when many in advanced economies are expressing doubts.

At the same time, we believe that effective and credible leadership in support of globalization also requires a willingness to recognize and address one’s own shortcomings. That means China should be open to look at its own restrictions on trade and investment, which have generated criticism from some trading partners. It also means protecting intellectual property rights and reducing the distortions of industrial policy, overcapacity, and policies that favor state enterprises.

Globalization will not receive sustained global support unless it is based on free and fair trade and investment practices, with an updating of rules and institutions, as the sophistication and complexities of the global economy evolve and as technology changes the economic landscape.

Better Globalization

Better globalization is in China’s own interest. The protectionist sentiments that have arisen in the West are a response to the perceived shortcomings of trade and economic integration and the unaddressed gap between winners and losers. So far, this has not become an issue in Asia where there have been few losers; rather rapid growth has resulted in big winners and smaller winners.

But as development and new technology change patterns of competitiveness, there is no guarantee that this will continue unabated.  China needs to be alert to the discontent with globalization as it is currently configured and support a global economic order for the future that will be widely embraced.

Finally, a few words on China as a creditor and investor. China has taken on an important role in the developing world by providing the funding to develop infrastructure. This could benefit dozens of countries. But there are concerns about the debt that countries are taking on to finance this undertaking.

Some developing countries may face unsustainable debt burdens if recent lending trends continue. The Chinese government and its lenders have begun considering the benefits of strengthened frameworks for debt resolution that could be used if needed.  We believe it is urgent to establish such frameworks and work cooperatively to ensure that the developing world does not face a new debt crisis.

Impact of Chinese Investments

And while China’s foreign direct investments have been growing in size and importance, bringing positive benefits to many developing countries, it will be important for China not only to ensure that those investments are commercially viable. It also needs to take account of their impact on governance, capacity building, sustainable development and environmental protection.

China’s constructive role in global institutions like the IMF is critical to our ability to adapt to a changing global economy. We greatly value China's leadership and we look forward to continuing our excellent collaboration.

Today I have tried to spell out the key global economy challenges to be addressed in the coming years. Asia has been an impressive engine of growth and a source of prosperity over the past decade. Going forward, the challenge is to ensure these achievements are sustainable and inclusive. Thank you.