Monday, November 14, 2011

CHina: Help Europe, help thyself

International Monetary Fund Managing Director Christine Lagarde warned in a Nov. 9 speech in Beijing that the global economy risks “a lost decade of low growth and high unemployment” unless countries work together to resolve debt crises.

And China’s monetary-policy makers, she said, have a key role to play. “When inflation pressures are high and monetary policy is accommodative, monetary tightening makes sense,” she said at the 2011 International Finance Forum. “But when inflation is under control and exposure to external dangers is high, countries can hold off on monetary tightening.”

Lagarde is an attorney who served in several French government posts before being named the first woman to head the IMF in July.

Lagarde pushed for financial regulatory reform in France during the 2008 global financial crisis. She also called for raising core-capital adequacy ratios at systematically important banks to 9%, at a time when other French and German leaders sought to delay stricter requirements.

In an interview, Caixin asked Lagarde to comment specifically on Europe’s current debt woes, the IMF’s role in fixing them, and what China can do to help. When asked about her economic philosophy, Lagarde described herself as “with Adam Smith — that is, liberal.”  Caixin: You said this morning China needs to loosen its monetary policy to help the world economy. Could you elaborate on that?

Christine Lagarde: This morning I was talking about Asia in general. In China, the policy that has been adopted so far has been aimed at lowering credit growth after the stimulus of last year, with a view to reducing inflation and credit-quality risks. As we see inflation go down currently, this trend is appropriate and should be maintained for now. Monetary tightening doesn’t have to be vigorous and aggressive, it can be tempered and prudential.

Have you gotten any reaction from the Chinese government?

There was no specific hostility or disagreement with my suggestion. But maybe he hadn’t had time to look at my remarks.

China has pledged to move to full yuan convertibility. Why is that important?

I suppose full convertibility coupled with the internationalization of the currency would certainly help China include its currency in the basket of currencies that underlie the Special Drawing Rights. I think that would be a good signal, because China is such a key player and a leader in the global economy. … It’s a little bit strange that such a large international player, such a leading country, does not participate in the currency grouping.


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