IMF Update

Transcript of a Press Conference with Christine Lagarde

Beijing, China
Wednesday, November 10, 2011

MR. RICE: Good afternoon, everyone, welcome to this IMF Press Conference and thank you for coming. It's my pleasure to introduce you today to the Managing Director of the IMF, Madam Christine Lagarde. We also have with us today the Director of the Asia Pacific Department, Mr. Anoop Singh and our Resident Representative here in Beijing, Mr. Il Houng Lee. We'll get underway immediately with some remarks from Madam Lagarde, but could I say in advance that we will try to take as many questions as possible, but that means keeping the questions short and I would ask that when you do give your question, please identify yourself by name and affiliation. Madam Lagarde?

MS. LAGARDE: Thank you very much, Gerry. Merci beaucoup. Bonjour. Good afternoon. First of all, let me say how delighted I was to come back to China. I've been to this country many, many times in my previous capacity as Chairman of Baker McKenzie, a law firm, then as Minister of Trade where I met some of you and later as Minister of Economy and Finance for France. But this is my first visit as Managing Director of the International Monetary Fund. It has been for me a very productive, very interesting, very rewarding trip in view of the depth of the discussions, the value of the exchanges that I've had yesterday with Governor Zhou with whom I had lunch and good discussions, and later on in the day with Vice Premier Wang Qishan. And I'm very much looking forward to meetings this afternoon with Premier Wen Jiabao. and Vice President Xi Jinping. In addition to that as some of you may know, I was a speaker at a seminar yesterday organized by the International Finance Institution and we had a chance to discuss and exchange views about the current economic situation, but also the situation of the financial sector.

In my discussions with officials, I expressed my personal view and the view of the Fund and I would summarize them up around a few C's. My first C is the connectedness that is apparent, that is obvious, between all economies. You'll remember there were discussions about decoupling, about the potential immunity of some emerging markets from the rest of the world. This is clearly not the case. We have found that empirically in our research at the IMF, and it's obviously explicit from what we are seeing in Europe and particularly the Euro Zone and the consequences it has or might have in the future on other markets, including the emerging markets. So that's my first C, the connectedness that is critical and exposes all economies to decisions or events taking place elsewhere in the world.

My second C is clearly the comprehensive approach--and that was the topic for the discussions that I had yesterday with some of the officials and that I will have yet again today. Comprehensive means this approach of macroeconomic policies which include both the fiscal approach by authorities as well as the monetary policy that is decided by the Central Bank and that clearly combined have a significant effect on the economy as well as the structural reforms that are underway. In the discussions, I conveyed that we at the Fund believe that the Chinese authorities have been certainly heading in the right direction as indicated in the twelfth 5-year plan, and are also taking the appropriate approach on fiscal policy and monetary policy. On the latter, however, given that inflation is going down, as was recently demonstrated by the figures released yesterday and as the portfolio of suspicious loans are clearing off, there may be at some stage in Asia in general, although not immediately in China, for a loosening of the tightening of monetary policy. I'm not suggesting that this is needed now, but it might happen in the future as inflation abates and as the quality of loan portfolios improves.

The third one that I would mention in my C's is consumption. This is clearly one message that I conveyed to my hosts and that is the fact that the Chinese economy could rightly so be more driven by consumption than it is at the moment. It's clearly a trend. It's a direction that is adopted by the officials, but it's one that we see as a critical step forward. Combining the likes of exports, investment and consumption would certainly give a more balanced growth model for the country and would also help outside China.

My third C is about cooperation. Certainly the G-20 Summit in Cannes only a few days ago but also the discussions that I've had recently indicate that the situation of the global economy can only be improved if there is an appropriate degree and level and cooperation between the players. It is certainly in the advanced economies that action is necessary as a matter of priority, but it's also true that emerging markets--and large emerging markets in particular--have a role to play either by reengineering their growth model, but letting their currency appreciate appropriately and also by being participants in all the discussions that are taken place with a view to resolving the current crisis.

I would also like to say how grateful I am to the Chinese authorities for their very, very warm and courteous and elegant hospitality in the last 24 hours or so. It's been a delight to be back in China, it's very pleasant to see you all in the room and I hope that you will not ask all your questions just about Greece and Italy. With that, the floor is open for questions now.

QUESTIONER: Thank you. European politics has made it difficult to exercise leadership needed to deal effectively with the crisis and many economists and politicians now agree that there must be someone else to weigh in and play the role of the conductor for the whole rescue symphony. In your point of view, should and can the IMF play such a role? If no, why not? If yes, do you have any specific plans on the table regarding how to channel monies from the emerging markets to the Euro Zone, whether the IMF is willing to act as lender as last resort and whether the G-20 will grant the IMF the mandate to do so? Thank you very much.

MR. RICE: Thank you. Several questions there. Let's take a few more.

QUESTIONER: . My question is, can China use Chinese currency to save Europe by means of investing in EFSF?.

QUESTIONER: I would like to have your opinion on the current situation and what can the IMF do to help Italy out of debt.

MS. LAGARDE: You three are making my life easy in a way. You want it to be more complicated, but you're making my current job answering your questions easier. For you to keep in mind, the IMF typically does three things. It provides surveillance on a bilateral and multilateral basis, on a sector-focused basis and on a cross-border basis. Second, it lends. It lends to countries that request it and it does so essentially in the situation where the current account of a country is in difficulty, and we do so for all members of the organization which has 187 members. Finally, we provide technical assistance on specific matters. Forinstance, in China we provide technical assistance on the taxation system.

In the case of Europe, the IMF has been called upon co-financing certain programs. In the Euro Zone it is the case for Ireland, for Portugal and for Greece. The European members were sort of reluctant to let the IMF be involved in the co-financing. The IMF has the longstanding experience of such situations, coming into a country, starting a dialogue, assessing the situation, providing a recommendation and then putting together a program that is associated with financing. We are currently doing that in about 20 percent of the European Union countries. I've mentioned three of them within the Euro Zone, but there are a couple of others outside the zone as well.

We have been asked very recently to go deeper in our surveillance mission by providing intensified, accelerated periodic published reports on Italy. As you see, from the traditional activities that we've had, at least two of them are extensively used in Europe and particularly in the Euro Zone. The IMF will continue to be available to all its membership. It was the case in Latin America in the 1980s, the case in Asia in the 1990s and certainly currently the focus on the bulk of our lending is in Europe and more particularly in the Euro Zone. We are prepared to play the role that our membership expects and we do so on the basis of our expertise and our rules. We don't do it randomly or on an ad hoc basis. We have principles and we have conditionalities and we do it not by the book because we do check against each and every situation, each and every country's specifics because every situation is different, but we will do so as requested.

I think you asked the question about Chinese money and I owe you the response. China is already one of the top shareholders, members if you will, of the organization. It's in the top three. As such, it's a key partner with whom the IMF has had a constant, deep and good dialogue. We compare notes, we discuss strategy and as a result of the reforms that recently took place, China's role, China's voice, has been certainly bigger and louder.

It's for every member to decide what it wants to do with its money, but don't forget that when money is invested by members in the IMF, it remains their money and then it can be managed, it can be used for support packages, for lending, for programs, but it's essentially the country's reserves in a way. So if it were the will of any member to increase its bilateral lending, for instance, or contributions, it is certainly welcome but it is on that basis that we operate.

QUESTIONER: The yield rate of Italian debt has reached to 3.4 percent. What do you think is the most urgent thing the Euro Zone needs to do at this point?

QUESTIONER: Your comment about China. Are you urging China or are you discussing with China a bilateral loan to the IMF? And if China were to make such a loan, would it be used for general purposes or would it be used in an earmark fashion for Europe? Secondly, you mentioned appreciation of the renminbi here and yesterday as well. Economics here seem to be going against appreciation given that growth in exports is declining. What's your recommendation to the Chinese in terms of further appreciation and what's your expectation?

QUESTIONER: My question is from the IMF's point of view how to increase the contribution from consumption to China's economy -- increased contribution from consumption, domestic?

QUESTIONER: -- Rumors have been spreading that France and Germany are negotiating establishing a co-Euro Zone. What is your comment on this? Is it gossip or rumor?

MS. LAGARDE: Your question about Italian yields and what the Euro Zone should do as a matter of urgency. Looking at it from my perspective as Managing Director of the IMF and as a potential provider--either lending, surveillance or technical assistance--is political clarity. That is what we need as a lender and I believe that many lenders and many investors actually expect exactly that to happen, political clarity. It's much needed in Greece and it's much needed in Italy. There are clearly some rumors, allegations, trepidations, expectations; no one understands exactly who is going to come out as the leader and when and I think that that confusion is particularly conducive to volatility. So from my perspective as the IMF, political clarity is conductive to more stability, and my job, my objective, from the Fund's point of view is better and more stability.

Concerning the relationship of the Fund with China and its deep dialogue, clearly there is a relationship of trust between the Fund and China and if I were to discuss the terms of any particular loan be it bilateral administered or any other shape or form, I would not comment on it here, which doesn't mean to say that I'm discussing this. The point that I can be clearer about to your question is that most of those emerging-market economies and their leaders who have indicated a willingness to participate in the strengthening of the institution, the IMF, have done so with the explicit indication that it should not be specifically targeted for the Euro Zone, but it should be available for the strengthening of the institution so that the IMF can respond to the needs of the entire membership.

There is clearly a concern on the part of the middle-income countries for instance or those that we call the crisis bystanders who have had nothing to do with the crisis who are solid in their economic fundamentals and yet are likely to be hit by an external shock and therefore deserve or entitled to have access to funding. And it's in that vein that we are working as you know on a new financial instrument, this precautionary liquidity line, that is called for by those crisis bystanders. So it's in that context of serving the entire membership under the circumstances that quite a few emerging-market economies have indicated their willingness to participate in the process of strengthening the institution.

On the question of further appreciation of the yuan. I'm glad that you referred to the further appreciation because there has been appreciation and my understanding is that the authorities are prepared to let that appreciation continue in the months and years to come, and certainly from our perspective with the goal of stability and this solid, balanced, sustainable growth that we pursue, clearly that is welcome and that is encouraged.

On the question of the contribution to consumption and how can Chinese domestic consumption be increased. I think it's very much a factor of individuals' anticipation, and to that end if they feel confident that they have a pension scheme, that health care will be available, that there is a welfare system and those social stabilizers that will look after them if things go badly, then there is a natural tendency to increase consumption. So that from that perspective there is a clear link between the structural reforms that China has initiated and continues to implement and the reengineering of the growth model.

I don't like to comment on gossips and rumors and nonattributed comments, so I am afraid that I'm not going to address your last question.

QUESTIONER: You mentioned the G-20 Summit's agreement on the management -- SDR. Would you like to talk about something about the details about this SDR --

QUESTIONER: Bonjour, Madam Lagarde -- in what degree China is really concerned by the European crisis? How could the European crisis impact here? Some businessmen are talking about protectionism and fearing it. Could you answer please in English first and a little bit in French? MS. LAGARDE: First on special drawing rights, I think there were two channels of discussions involving the special drawing rights. The first one had to do with the composition of the basket of currencies and whether or not and if so when the yuan could be integrated into the basket of currencies, and there were some good discussions about it. I don't think the time has yet come, but there is a clear understanding that that will come in due course and it will be a factor of the internationalization of the currency. But in my view, it would be a strong signal that China is a key player but also an important partner in the composition of this sort of notional, easily convertible currency of the IMF.

The second channel around the special drawing rights was the question of a new allocation of SDRs. That has not yet been concluded, but it's a matter that clearly has been debated and there is a good meeting of the minds if I may say without it having been totally conclusive yet. So it might come and it might be helpful.

The Chinese authorities are clearly concerned about what is happening in the Euro Zone. It goes to the point about connectedness; what happens in the Euro Zone has an impact on the rest of the economies particularly an economy that is export dependent in terms of growth model. So, yes, I had quite a few discussions about the current status of the Euro Zone, about the implementation of the October 26 and 27 agreement between the Euro Partners and the future of the EFSF. I had discussions as well with business people in China and they expressed the same concern and had the same questions about it. So there is a strong degree of not only curiosity but also concern about what's happening in the Euro Zone. (French)

Thank you very much, and let me congratulate you for your ability to speak this lingua franca that English is, and apologies for not being able to communicate in Chinese. Maybe that time will come too.