Currency Issues and Credit Must Keep Markets Stable, Says IMF's First Deputy Managing Director
Yang Yanqing|Zhou Ailin
/SOURCE : Yicai
Currency Issues and Credit Must Keep Markets Stable, Says IMF's First Deputy Managing Director

(Yicai Global) May 15 -- The global economy is finally managing to gain a relatively robust momentum of recovery in the aftermath of the financial crisis that occurred almost a decade ago.

This April, the International Monetary Fund (IMF) raised the expectation on the global economic growth for this year to 3.5 percent, compared with only 3.1 percent last year. Yet, trade protectionism may remain the arch-foe of economic recovery.

David Lipton, first deputy managing director of the IMF, agreed to an exclusive interview with Yicai Global at last month's 2017 Spring Meeting of the World Bank Group and the International Monetary Fund.

Lipton enunciated the message that IMF wishes to convey to IMF members and G20 members, "If we wish to continue to push globalization, then we must recognize it is an imperfect process, and it inevitably involves problems and defects which all countries must address. Thus, in the face of complaints, we should accept these and strive to minimize the negative effects brought by globalization." Speaking of the negative effects of globalization, for instance, almost every party believes that fiscal policies should better serve to make improvements, such as expanding investment in education, and re-training the unemployed, to respond to the globalization and technological progress.

The trade balance between China and the US poses a challenge to both countries and the world. China's trade surplus with the US has reached USD254 billion, data from China's General Administration of Customs shows and this number amounts to up to USD347 billion per US statistics. "To regulate the global imbalance may also help to improve the bilateral imbalance, but certain distortions may also exist and harm the bilateral trade balance, and the parties involved must resolve these via through consultation," Lipton said.

With respect to China's economy and finance, Lipton noted that the IMF has been calling on China to quicken the progress of its economic rebalancing, said China's current financial deleveraging is moving forwarding in the correct direction, and added that the central bank and relevant regulators must ensure that currency issues and credit help to maintain market stability, and address the mismatching of resources.

A summary of the interview appears below:

Global Economy Maintains Powerful Recovery

Yicai Global: The financial crisis has been over for nearly ten years. We finally see global economy recovering. However, it is viewed as a periodic recovery rather than a structural recovery. How does the IMF evaluate the global economic situation now?

Lipton: First, global economic growth last year was projected to be 3.1 percent, but that figure has been adjusted upward to 3.5 percent, and 3.6 percent next year. The recovery trend is strengthening in line with the expectations of October last year. Since the middle of last year, a worldwide recovery has occurred in the industrial production and manufacturing industries. This trend is underway not just in individual countries, but marks a stable global recovery.

Above all, we find both global investment and trade are increasing. In the past 30 years, trade growth was faster than GDP due to deepening globalization. After the financial crisis, the trade growth trailed that of the economy, and this worried people. We predict that trade growth will later surpass that of economy, which is a positive trend, showing the global economy is finally shedding the crisis. It is also connected with the economic recovery in China and the price rebound of global bulk commodities.

Yicai Global: What does the IMF think about potential risks hindering global economic recovery?

Lipton: Although economic recovery is good news, economic and political risks still exist. In the spring annual conference, the IMF prioritized discussions of how these risks might disturb the economic recovery trend, and how to solve them. For example, investment fell after the financial crisis, and trades is sensitive to investment. G20 members have taken nearly 3,000 trade protectionist actions after the crisis, and this impedes 6 percent of global imports.

Yicai Global: The communique the G20 Ministerial Conference released in February this year deletes the phrase 'against trade protectionism.' Does the role of G20 decline on this issue?

Lipton: Globalization has driven economic growth in China in past decades. This is very important for the future development of China and other emerging market economies. President Xi Jinping also made a similar statement at the Davos World Economic Forum. Today, as globalization keeps deepening, we want to convey the information to IMF and G20 members that if we wish to continue to advance globalization, then we must recognize it is an imperfect process, and it inevitably involves problems and defects, which all countries need to address. Thus, in the face of complaints, we should accept them and strive to minimize the negative effects brought by globalization.

We also want to say to those who are unsatisfied with globalization and their leaders that it is important to maintain global interconnection. It cannot be abandoned. In the long run, it will speed up the development of emerging markets, help them integrate into the global market, and finally benefit developed countries and the global market.

Yicai Global: Is the US Border Adjustment Tax incompatible in this regard?

Lipton: The new US government still has many new policies to release, and these sow many uncertainties. We will have to wait and see. The Trump administration has not decided on some policies yet. The position of the IMF is that we wish to boost globalization and when the government of one country is about to make policies, it should consider their overflow effect, including corporate tax reform and deregulation of finance.

Sino-US Trade Rebalances

Yicai Global: After the meeting between Chinese President Xi Jinping and US President Donald Trump, China and the US have formulated a '100-day Plan' to try to ameliorate the trade imbalance between the two countries. What is the IMF's suggestion for China to reduce its huge trade surplus with the US?

Lipton: The IMF mainly assesses the global trade balance. For bilateral trade, there may be a certain imbalance between two countries. Some trade barriers and distortions have led to this imbalance, and there were many worries before and after the US presidential election, which is understandable. Now we are pleased to see that Chinese and US governments can discuss what the fundamental problems are and means to solve them through negotiations, and we hope that the two countries can take constructive and pragmatic measures.

Yicai Global: The US Treasury Department released a report at the end of April, saying that China is not a 'currency manipulator,' and Trump also previously said that China does not manipulate the yuan exchange rate. How do you see the role of the yuan value in China-US trade?

Lipton: At present, in addition to China and the US, members of the North American Free Trade Agreement (NAFTA) -- the US, Canada and Mexico -- are also assessing and negotiating trade imbalances. The trade imbalance that concerns us is global. The IMF has conducted independent research into and evaluation of this issue, that is, the 'External Sector Report.' The report will be released in the summer.

The US has its own monitoring and evaluation standards, and announced its conclusion at the end of April this year. The IMF is pleased to see that the US has reached a conclusion that is consistent with the IMF's. At the same time, the IMF will make its own judgment. The IMF has called on China all along to improve its economic imbalances and shift from export-oriented, industry-led economic development to a growth model dominated by consumption and services. China should continue to promote this, and the IMF will also continue to discuss it during the Article IV Consultation with China this year.

Yicai Global: What is the way to reduce China's trade surplus with the US? From another standpoint, the surplus results from the difference in the economic structure of the two countries, and is reasonable.

Lipton: I hope both countries can discuss this issue with an open mind. Part of the surplus may be reasonable, with no change needed, but some may be caused by policies and other distortions and must be improved. We use a top-down approach to examine this issue, such as the macroeconomic situation and how macroeconomic policies affect China's trade balance with the world, so we are also calling on China to promote economic rebalancing and reform.

Regulating global imbalances will also improve bilateral imbalances. However, there may be some specific distortions, which are not global problems, but caused by China's domestic micro-level factors, which will be deemed problems that may affect the bilateral trade balance in the view of the US. These will require both sides to resolve them through consultation, but the IMF's focus is not here.

Yicai Global: Risk prevention and bubble suppression are China's core tasks this year, and the process of financial deleveraging is also advancing. What advice do you have for China in this respect?

Lipton: China is facing several policy missions. The first is to prevent excessive debt growth, which will spin corporate debt out of control. The second is to maintain economic growth within a reasonable range, and third, to promote economic rebalancing. This means that the central bank and regulators must ensure the maintenance of market stability while issuing currency and approving credit loans, as well as proper allocation of resources; which is to say inefficient sectors cannot always consume resources.

Yicai Global: The IMF has suggested that China could use interest rate hikes to promote deleveraging. What is the logic behind this?

Lipton: China's central bank has been using a series of tools, such as credit growth control and interest rates. For fiscal policy, the focus is to prevent overly-high government debt. But we believe that fiscal policy should also support economic rebalancing and coordinate with expenditures and tax policies. China's overall policy direction is correct, and the IMF will further evaluate it during the Article IV Consultation with China this year.

Yicai Global: The Fed's interest rate hike and shrinking balance sheet -- which will have a greater impact on the global market?

Lipton: I'd like to say it in another way. With the recovery of the US economy, monetary policy needs to adjustment, and this is supported by economic fundamentals. The IMF believes the US will make the right choice. What the US must avoid is a disconnect between monetary policy and economic fundamentals, which can have spillover effects on countries around the world.

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Keywords: IMF , David Lipton , Interview , Global Trade Balance , Monetary Policy