IMFC Statement by Mr. Dai Xianglong, Governor of the People's Bank of China, Washington, D. C., April, 20, 2002

IMFC Meeting April 20, 2002

April 20, 2002 IMFC Statements

Documents Related to the April 20, 2002 IMFC Meeting

People's Republic of China and the IMF

Statement by Mr. Dai Xianglong, Governor
of the People's Bank of China
International Monetary and Financial Committee, Fifth Meeting
Washington, D. C., April 20, 2002

I. World Economy

The world economy has shown signs of recovery following a short recession, but substantial uncertainties still exist.

With supportive monetary and fiscal polices, the U.S. economy is beginning to recover. In Europe, the economy is expected to pick up toward the end of this year. The successful introduction of the physical euro has been a major international monetary event. Although still in recession, the Japanese economy has shown signs of bottoming-out and thus there is no justification for being overly pessimistic about its prospects, especially when its substantial economic strength is taken into account. Some Asian developing countries have maintained rapid growth in the global slowdown. The Russian economy has embarked on a steady recovery. Latin American economies have largely been stable, and have not been seriously affected by the negative impact of the Argentine financial crisis. Though faced with an adverse external environment, African countries have managed to maintain relatively stable growth―an important achievement compared with that of the past few years. International trade is expected to pick up significantly following a weak performance in 2001. In general, compared with last year, the prospects for global growth are expected to improve in 2002, providing a more favorable external environment for all countries.

Nevertheless, there are still risks associated with prospects for a steady global recovery. There is no clear indication yet of a steady pick-up in the U.S. economy, largely reflecting the fact that the causes of the recent slowdown have not been fully resolved. Investments remain weak; enterprises are suffering from poor profitability; unemployment has fallen somewhat, but remains high; uncertainty still exists as to whether the increase in consumption will be sustained; and persistent large current account deficits have long been a threat to the stability of the U.S. dollar. Further material progress is needed in the structural reforms in the euro area, and the value of the euro has not been reflecting Europe's economic strength. Japan needs to intensify its efforts to pull its economy out of the current difficult situation. Moreover, sudden and unexpected events may bring shocks to the economy, energy prices in particular. Against this background, we should not be overoptimistic about the recovery currently underway. Increased vigilance is warranted against a "W" shape recession. Heightened vigilance to developments in the stock markets is also justified, especially at a time when enterprises are suffering from poor earnings.
Several other issues that have major impacts on the world economy also deserve attention. The irrationality inherent in the international monetary system has contributed to the uneven allocation of global resources and large fluctuations among major currencies, which, in turn, has affected the development of international finance and trade. Due attention should be paid to protectionism, which has once again gained ground in a weak economic environment.

In order to ensure a steady recovery, major developed countries should actively take steps to coordinate their economic policies. At present, efforts should be made particularly to maintain a proactive monetary policy stance, restore stability in some regions, and keep up the momentum of economic recovery. At the same time, measures should be taken to avoid large fluctuations among major currencies, so as to provide a stable environment for the world economy. Developed countries should speed up the provision of financial assistance and the transfer of technology to developing countries, make their markets fully accessible to developing countries, and implement the Monterrey Consensus to increase ODA. We hope that Japan, as the second largest economy in the world, will push ahead with its structural reforms to gradually recover from recession. It should also make efforts to stabilize the exchange rates of the yen, thereby creating favorable conditions for the steady development of the Asian economy. The developing countries should also take advantage of the pick-up in the world economy to accelerate structural reforms in light of their own specific situations, in order to benefit from global recovery and trade expansion.

We support "multi-polarization" of the world economy. This will help promote harmonized and balanced development of the global economy and the establishment of a new international political and economic order that is fair and rational. In this regard, it is obviously beneficial to expand the use of SDRs as an international reserve currency. Conditions should be created to encourage such an effort. Being the center of the international financial system, the IMF should attach greater importance to the reform of the international monetary system, paying more attention to the unbalanced development of the world economy in finding possible solutions. Regional economic development and intra-regional economic trade and financial cooperation should be encouraged. These will help promote a stable, sustained, and rapid growth of the world economy.

II. The IMF's Policies

1. Strengthening Crisis Prevention and Resolution

The IMF plays an important role in safeguarding international monetary and financial stability. At the present juncture, the IMF should strengthen its surveillance over major developed countries, maintain stability among major currencies, effectively monitor and regulate international capital flows, and ensure the sound and effective operation of the international financial system. These will help sustain the emerging global recovery.

The IMF has been making unremitting efforts in crisis prevention and resolution. It has been working to promote private sector involvement in crisis resolution, emphasizing that the Prague Framework, under which the private sector voluntarily and collectively participates in crisis resolution, should be constantly reformed and improved in actual practice. The issue of sovereign debt restructuring deserves the careful attention of the international community and the national authorities. The IMF has made good progress in exploring new ways to restructure sovereign debt. A thorough review should be conducted, comparing various schemes, fostering strengths and avoiding weaknesses, so as to arrive at a method acceptable to both creditors and debtors.

With the pace of globalization accelerating, it is essential to establish a new international economic and financial order that is fair and equitable. Unfortunately, developing countries have not been able to take full part in this process, particularly in the formulation of major international economic and financial standards and codes, and their specificities have not been fully taken into account. We hope that the international community, when drawing up standards and codes, will pay due attention to the varying situations and specific needs of developing countries, and let their voices be adequately heard in this process. At the same time, we reaffirm our position that the standards and codes should be implemented on a voluntary basis. In addition, while the governments have committed to enhancing transparency, transparency of the private sector should also be strengthened. China has formally subscribed to the GDDS, and is taking earnest steps to improve its banking accounting rules and information disclosure.

International financial crises have been frequent since the late 1990s. The crisis-hit countries were denied access to international capital markets, posing a threat to global financial stability. The IMF should work on this issue carefully. It should, to the greatest extent possible, increase financial support to the crisis-affected countries and help them overcome their current difficulties. In this context, we call for an early approval of a one-off special allocation of SDRs. At the same time, the IMF should actively consider the issue of the general allocation of SDRs.

2. The IMF's Role in Low-Income Countries

We commend the efforts made by the IMF and the World Bank in poverty reduction, and hope the two institutions can streamline the procedures and fully respect ownership by recipient countries, so as to bring the initiatives of the authorities and peoples of these countries into play. The international community should also promote transfer of capital and technology to developing countries and facilitate proper global allocation of major production factors. The IMF should implement vigorously the initiatives in the Monterrey Consensus, and urge developed countries to reach the target for ODA of 0.7 percent of GNP as soon as possible. In addition, efforts should be continued to reduce debt of the least developed countries through the HIPC Initiative. In this process, developed countries should assume the major responsibility, and unfair burdens on other developing countries should be avoided as far as possible.

China is still a relatively low-income developing country with tens of millions of people living below the poverty line. While striving to reduce its own poverty, it also vigorously supports and participates in the international community's efforts to reduce poverty. Within its capacity, China has provided support to developing countries directly and indirectly through low-rate or zero-rate loans as well as through grants, on a bilateral and multilateral basis.

Poverty and unbalanced development are the root cause of many problems. Only if importance is attached to resolving these problems can lasting peace and development be achieved in the world. It must be understood that poverty reduction is an arduous long-term task. While providing financial and technical assistance, the international community should be fully aware of the constraints faced by the poor countries in such areas as infrastructure and capacity building, so as to avoid imposing unrealistic requirements and expectations on them, which would hamper progress of poverty reduction and increase the burden on these poor countries.

3. Streamlining Conditionality and Strengthening Ownership by Recipient Countries

We welcome the vigorous efforts made by the IMF to streamline its conditionality and to strengthen ownership by member countries. The IMF should sharpen the focus of programs and allow member countries to have more flexibility in achieving the agreed policy targets. In formulating programs, the IMF should fully take into account opinions of the member country authorities, carefully study the specific problems of member countries, and allow them to have a stronger voice. We encourage the IMF and the World Bank to further strengthen cooperation and division of labor, appropriately share resources, and avoid duplication of conditionality.

4. Anti-Money Laundering and Combating the Financing of Terrorism

The Chinese government firmly supports and implements the resolutions of the UN Security Council on anti-money laundering and combating the financing of terrorism. China is now drafting relevant laws and regulations, and organizational adjustments have been made to strengthen the anti-money laundering forces.

We are of the view that efforts on anti-money laundering and combating the financing of terrorism should be carried out by national governments under the leadership of the United Nations; the sovereignty and situations of individual countries should be respected; and the ownership and initiatives of national governments should be brought into full play. The international anti-money laundering organizations should broaden their representation, and should especially involve developing countries in this process. Within the confines of its Articles of Agreement, the IMF should support international efforts in anti-money laundering and combating the financing of terrorism, centering on its core mandate of maintaining the stability of the international financial system. Various international institutions should also take part in these efforts, according to their respective mandates and expertise. We have reservations about the IMF incorporating the anti-money laundering issue into its Article IV consultation process since anti-money laundering is within neither the responsibilities described in the Articles of Agreement nor within its core areas of activities.

5. Representation of Developing Countries

As a result of the developments since the end of World War II, the share of developing countries in the world economy has increased. However, this has not been reflected in their quotas and representation in the IMF. Moreover, IMF quotas are closely related to the rights of its member countries, such as access to the institution's resources. Therefore, we call on the IMF to complete its review of quota formulas as soon as possible and introduce new formulas to reflect objectively and fairly the status and needs of developing countries in the world economy, and especially to increase the representation of the African countries in the IMF.

III. China's Economy

In response to the significant global slowdown, the Chinese government has initiated the strategy of increasing domestic demand by implementing a supportive fiscal policy and a sound monetary policy to expand investment in the infrastructure of urban and rural areas, and also in the areas of science and education; adjusting the structure of the economy and accelerating the build-up of the social security system; optimizing the structure of industry and developing the high technology sector, so as to enhance financial reform and reform of the state-owned sector. In the meantime, the successful inauguration of the West Development Campaign allows China to maintain rapid economic growth, improve the quality of growth and economic efficiency, and allow the financial sector to operate in a stable manner.

At the end of the first quarter of this year, China's GDP grew by 7.6 percent, compared with the corresponding period in the previous year, consumption increased by 8.4 percent, and fixed-asset investment rose by 19.6 percent, and there was a modest decline in the CPI by 0.6 percent. Total exports amounted to US$64.7 billion, an increase of 9.9 percent over the same period last year, total imports amounted to US$57.4 billion, up by 5.2 percent, the volume of gross trade reached US$122.1 billion, registering an increase of 7.9 percent, and the cumulative trade surplus amounted to US$7.2 billion. Additional FDI amounted to US$10.1 billion. Foreign exchange reserves rose to US$227.6 billion, an increase of US$15.4 billion over the end of last year.

It is worth mentioning that China's fiscal and tax revenue has risen rapidly, thanks to the strengthening of fiscal reform in recent years. Fiscal revenue in 2001 grew by 22.2 percent over the previous year, contributing significantly to China's economic strength.

In 2002, the Chinese government will continue to strengthen domestic demand, implement a proactive fiscal policy and a sound monetary policy and other supportive macroeconomic policies, in order to facilitate rapid growth of the national economy, intensify structural adjustment and deepen reform of the economic system, increase employment, improve people's living standards, and speed up the development of agriculture so as to increase the income of farmers. China will honor the commitment it made when joining the WTO, and will accelerate its opening up to the outside world. We are striving to speed up financial sector reform and the reform of state-owned enterprises, meet the challenge of accession to the WTO, and maintain a sustained and sound development of the national economy.

With the implementation of a supportive fiscal policy, the Chinese government's fiscal deficit and debt will increase, and indeed, the fiscal side is facing certain pressures. However, from the perspective of China's overall economic strength and development, the country's fiscal deficit is now still below the internationally recognized warning line and the debt level is acceptable. China is fully aware that it cannot implement a long-term expansionary fiscal policy. We will closely monitor the trends in all the macroeconomic indicators, timely adjust the fiscal policy when the basis for economic growth becomes more solid, and focus our policy on adjusting demand and supply instead of increasing demand.

Hong Kong Special Administrative Region (SAR) is facing temporary difficulties in the prevailing weakness of the global economy, due to its high degree of openness. However, Hong Kong SAR has a solid economic basis as an international financial center and is backed by the vast mainland market. We are convinced that under the leadership of the authorities, Hong Kong SAR will recover with the rebound of the world economy.

The Macao Special Administrative Region has implemented a number of measures to maintain social stability and enhance economic development after China resumed its exercise of sovereignty. Macao SAR now enjoys social stability and economic vitality. We have every confidence in its future.