Thumbnail: 

The head of the International Monetary Fund welcomes China’s pledge to continue with its stimulus package in 2010 and says the Chinese people would gain from a rebalancing of their economy.

In a meeting with reporters in Beijing, Dominique Strauss-Kahn said that the decision by Chinese authorities to continue with fiscal and monetary stimulus was “exactly the right policy to implement.”

“The main goal is to help with public demand, weak private demand. And the reason why we have to continue with stimulus is because a self-sustaining private demand is not yet visible,” says Strauss-Kahn.

Asian Rebalancing

During his trip to the region, the IMF managing director has been highlighting the Fund’s call for Asian countries—including China—to rebalance their economies, relying less on exports for growth and instead stimulating domestic consumption.

“The main reason why the rebalancing organized by the Chinese authorities is so useful is (because) it is in the interests of the Chinese people themselves, because it is a more sustainable model of growth,” says Strauss-Kahn.

The IMF head says part of the package to encourage domestic consumption included allowing the Chinese currency, the Yuan or Renminbi, to strengthen in value. He said it would boost the buying power of Chinese households and would be a part of necessary reforms in China.

“Allowing the renminbi and other Asian currencies to rise would help increase the purchasing power of households, raise the labor share of income, and provide the right incentives to reorient investment,” he says.

Asia’s Post-Crisis Role

Strauss-Kahn’s trip to Asia is a reflection of the IMF’s renewed focus on Asia as it leads the world to recovery. The IMF expects Asia's GDP growth to be 5.75% next year--almost double the 3% rate forecast for the global economy.

During an earlier stopover in Singapore, the IMF head called on the region to use its increasing economic importance and prominence to help mould the future of the world’s economy.

“I believe that Asia should play a leadership role in guiding the global economy to a new, more sustainable path for growth. This is not only appropriate given Asia's economic weight but also necessary, since Asia is such an important part of the solution."

Strauss-Kahn identifies three priorities for reshaping the post-crisis economy including global rebalancing, strengthening the international monetary system and creating a safer and more stable financial system.

Reform of Global Monetary System

On the reform of the global monetary system, the IMF head says the absence of an adequate insurance facility led many emerging markets to self-insure by building excessively large foreign reserves. This contributed to global imbalances and more instability. Strauss-Kahn says the IMF had the potential to serve as an effective and reliable provider of such insurance.

“However to serve as a truly dependable global lender of last resort, the Fund will need considerably greater resources,” he adds.

During a speech to hundreds of students in Beijing, the IMF chief says his organisation had done well in issuing warnings about the depth of the slump on the eve of the downturn. The IMF was uniquely placed to warn of the consequences of global crises, he suggested.

“Why are we so good in forecasting the consequences? Because this crisis is a crisis of the linkages between the real economy and the financial sector,” he says. “No other institution in the world works on these linkages."

Continued Stimulus

Earlier during his visit, the IMF head joined heads of state—including U.S president Barak Obama who was on his own region-wide tour—at theAsia-Pacific Economic Cooperation (APEC) forum where leaders pledged to continue with economic stimulus policies until recovery is assured.

"Economic recovery is not yet on a solid footing. We will maintain our economic-stimulus policies until a durable economic recovery has clearly taken hold," governments said in a statement ending their annual summit in Singapore.

Quote Image: