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As China shifts to a new growth model, the International Monetary Fund chief Christine Lagarde has cautioned that this transformation of the world’s second largest economy is expected to be bumpy and not a smooth ride.
“There will be little bumps on the road because no transition can be made absolutely smooth without any disruption, without any volatility,” Lagarde told reporters.
“I think we all need to get used to this little bumps on the road in that transition process, which as I said we welcome, together with the principles of more market determined exchange rate fluctuation, for instance, which we also believe is desirable and has been called for by many economic operators for many years, actually,” she said.
Responding to a question, she said the Chinese slowdown of growth is a phenomenon that was predictable, expected and anticipated.
Describing China’s economic transformation as a good move, she said, “To only grow at 6.8 and next year at 6.3, with a growth model that is no longer based on either massive export relative to domestic massive investment projects as opposed to consumption is a good transition, but it is a massive exercise.”
In her interaction with reporters, the IMF chief said there are many transitions occurring at the same time.
“First of all, on everybody’s mind, China’s shift to a new growth model. Second, the normalisation of US monetary policy. And third, the adjustment to potentially prolonged cycle of low commodity prices,” she said.
They need to be managed, and they can be managed with a policy mix that includes demand support through the arm of monetary policy and fiscal policy; financial stability measures; and structural reforms, she asserted.
“Second recommendation in our policy mix, watch out for spill over effects. For example, central banks in advanced economies should, and might actually already, give consideration to the risks of spillovers from their policy decisions. And emerging economies should firmly address the build-up of corporate leverage and foreign debt,” she said.
“So, manage the economic transition, watch out for the spill over effects, and take them into account,” she added.
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