(CBN - Global) April 7 -- Ms. Christine Lagarde, who was recently reappointed to a second five-year term as managing director of the International Monetary Fund, agreed to an exclusive interview with CBN during the 2016 China Development Forum.
In her view, China's central bank plays a critical role in China's external communications. Ms. Lagarde said "since last August, yuan exchange rate fluctuations have affected not only China's capital markets, but also other countries' stock markets. However, due to the effective communications used by the People's Bank of China, such fluctuations were eventually toned down."
On Oct. 1, the yuan will join the basket of currencies in the IMF's Special Drawing Rights, a type of reserve currency. China also holds the G20 presidency this year. This all means that China is even more closely connected to the world. The country's economic growth and market fluctuations, as well as its intricately related reforms, will have a significant impact on the world. China's decision makers are deliberating on how the country should view and deal with its relationship with the world, and how should it communicate with the world?
As global financial risks are exacerbated, the forecast for global economic growth in 2016 is expected to be lower, but China and India are among the few countries Ms. Lagarde remains optimistic about. On the issues China faces in trying to have 'steady growth' and to 'promote reforms,' she suggests that, "on one hand, there is a need to adopt growth friendly policies by investing in the right projects to increase demand; on the other, in terms of fiscal policy, there is still space to exert strength, and this needs to be implemented and realized."
From what Lagarde has seen "the principles for China's reforms involve being completely open, working to narrow gaps, and developing the spirit for creative innovation and entrepreneurship." She also believes that China's economic transformation will be successful if monetary policy, fiscal policy and structural reforms are included.
This year also marks the start of Lagarde's new term as IMF head. Against the background of a languishing global economy, and a huge spike in uncertainties, the IMF boss's work is not going to be easy. "I will continue to do my best to service the international community, and do all that is within the IMF's and my own abilities to provide quality, impartial, meaningful and helpful services to help ensure economic and financial stability as well as the development of member states globally," Lagarde said.
CBN: The IMF's Spring Meetings will be held in April. The IMF has said that there are larger risks inherent in the global economy, and it will reduce its economic growth forecast. What is your current assessment of global economic growth?
Ms. Lagarde: We may adjust lower our forecast for global economic growth in 2016. This is because we need to take into account the fact that global financial risks have intensified and downside risks have increased. However, currently, there are some countries whose situations are not too bad, such as India and China. Yet there are other regions such as Brazil, Russia and Japan, whose situations are not so optimistic, hence we need to reduce our forecasts for these countries. That is why we are going to cut our forecast.
CBN: You are more optimistic about China's economic growth, and think that the Chinese economy will not have a 'hard landing.' How do you evaluate the fundamentals of China's economy?
Ms. Lagarde: We think China is going through a major transformation at many levels. What impressed me the most is how deep, broad and ambitious these reforms are. And in the coming years, tackling reforms will be China's top priority. But I think if it acts according to its plans, China's economic transformation will be successful. The principles of the reforms involve being completely open, working to narrow gaps, and developing the spirit for creative innovation and entrepreneurship. If China is firm in moving towards market-oriented reforms, and full integration with the world economy, then the foundation that will enable it to move forward with its economic transformation will be powerful. I have every reason to believe this is how China will proceed, and China is indeed doing so.
CBN: At the end of last year, China's top leaders proposed policies of supply-side structural reform, but at the beginning of this year, as China's economic growth continues to trend downward, the urgency for the reforms may temporarily be replaced by the need for 'steady growth.' What do you think is the balance between steady growth and reform?
Ms. Lagarde: It is indeed difficult to achieve a balance between steady growth and reform. But China is trying various tools to achieve a smooth operation in the economy, including monetary policy, fiscal policy and structural reform, which are also what the IMF recommends to the world. We believe that many countries are over-reliant on monetary policy, and have not done enough in terms of fiscal policy and structural reform. For these countries, on one hand, there is a need to adopt growth friendly policies by investing in the right projects to increase demand; on the other, in terms of fiscal policy, there is still space to exert strength and this needs to be implemented and realized.
CBN: What is your advice to China on stimulating economic growth?
Ms. Lagarde: China can use various tools to stimulate demand, such as making use of credit channels. In addition, encouraging consumption is also a good economic booster. Structural reforms are on the task list for every country, and such tasks should be implemented immediately.
CBN: You mentioned fiscal policy. China's Ministry of Finance has said that the country's fiscal deficit will increase this year. Do you think this is the right time for such a move?
Ms. Lagarde: This depends on the content of the fiscal policy. If we can promote economic growth, and the public expenditure can be well utilized to maximize leverage effects, then it is appropriate. In addition, I think local government debts need not be very large, but there is a need to pay close attention to the size of corporate debts.
CBN: The IMF has stressed that China should strengthen banks' balance sheets and deal with corporate debts. Do you have any good suggestions?
Ms. Lagarde: I think that corporate debt restructuring and robust bank balance sheets go hand in hand. This requires a clear regulatory system that is designed to use market-driven mechanisms to deal with the issues. We think there are still many resources available for use.
CBN: From this year, China will reform its financial regulatory system. What are some of your suggestions for building a prudent macro financial regulatory system?
Ms. Lagarde: The Chinese government and the IMF have always worked closely together, and we can assist China with our technical support, training and other areas. At the same time, we are also very happy to help the Chinese government improve its judicial system to create a stable, transparent, market-oriented financial regulatory system.
CBN: What do you think is the role of the Chinese central bank in this process?
Ms. Lagarde: The role of the central bank is critical. Regardless of the country, monetary policy is an important base for building financial stability. On this, I believe that the People's Bank of China has done very well. It communicates monetary policy and exchange rate policy with the markets, and this has been very effective. Since last August, yuan exchange rate fluctuations have affected not only China's capital markets, but also other countries' stock markets. However, due to the effective communications used by the People's Bank of China, such fluctuations were eventually toned down.
CBN: You mentioned at Davos at the beginning of the year that the Chinese central bank should communicate better with the markets. Mr. Zhou Xiaochuan, China's central bank governor, is currently actively communicating with the market, and the yuan exchange rate has recently stabilized. In addition, Governor Zhou recently said that, in future, the yuan should reference the basket of currencies in the international markets, especially the SDR basket. What suggestions do you have for the next reforms in the yuan exchange rate system?
Ms. Lagarde: Governor Zhou has outlined very clear indications for the future of the yuan's exchange rate policy: to reference a basket of currencies, and perhaps one day the SDR basket, is necessary because this will create a trade-weighted exchange rate. Whether and whenever Governor Zhou wishes to refer to or scrutinize the SDR basket -- as long as he can communicate with the market -- the market will not be surprised. Presently, what the governor is hinting at is an interesting and positive commitment.
CBN: But will the SDR basket be too small for the yuan?
Ms. Lagarde: SDRs are transacted between central banks in various countries, and to handle such transactions requires both the software and the institutions. When any IMF member state needs the corresponding currency, they can always go to the central bank to exchange, because they know that the SDR will automatically convert into those five currencies. In my opinion, the bigger the basket, the less convenient it is. This is actually an 'exclusive club' where they can freely convert currencies, and it is recognized by the international community.
CBN: China, which holds the G20 presidency this year, has called for the G20 to resume the International Financial Architecture Working Group, and it wants to play a greater role in promoting the SDR. What are your expectations of China in this respect? What is the role that the IMF will play in this process?
Ms. Lagarde: I welcome the resumption of the International Financial Architecture Working Group. The current international monetary system is already in place and working, but more can be done to make the system stronger and reliable. This year, with better coordination and more customization, and by using tools that provide better experience, we can continue to strengthen the development of the international safety net based on SDR, and we will continue to discuss this agenda with member states.
CBN: The IMF is currently evaluating China, and will announce its latest report on Article IV consultations. Can you share some information on this?
Ms. Lagarde: This is still confidential for now. As this assessment requires independent economists and financial experts from the IMF to visit the specific country, examine the statistical data, and interact face-to-face with officials from the country to draw conclusions as well as provide some suggestions by comparing and analyzing the data, I will not interfere with their work. They look forward to meeting with Chinese officials for discussions, and the Chinese side also welcomes their visits. This assessment needs to be transparent, with data shared openly.
CBN: What are your plans for the next five years after your successful re-election?
Ms. Lagarde: I will continue to do my best to service the international community, and do all that is within the IMF's and my own abilities to provide quality, impartial, meaningful and helpful services to help ensure economic and financial stability as well as the development of member states globally
CBN: The IMF's Deputy Managing Director Zhu Min's five-year term will end in June. What is your evaluation of his tenure?
Ms. Lagarde: He has supported the Fund very well, and is a great team player. He is dedicated, and committed to focusing on small, vulnerable countries, and on growth as well as employment. He represents not only China, but is trying his best to represent the entire international community. Zhu Min has done a lot that he should take pride in, and I am proud of his leadership.
CBN: If he decides to return to China, will you look forward to another Chinese deputy?
Ms. Lagarde: We will consider it.