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IMF welcomes China’s SOE reform and credit control

China’s reform of state-owned enterprises (SOEs) and the continued reining in of credit in order to control its financial risk will be most welcome, said Christine Lagarde, Managing Director of the International Monetary Fund (IMF) on Oct 12.

“We certainly welcome the decisions that have been made, in particular by the People’s Bank of China, to actually…reduce credit,” Lagarde answered the question about China’s policy mix in a news conference.

“We also believe that a continuation of those policies is necessary, together with the reform of the state-owned enterprise sectors. So it was good to reduce capacity. I think it probably needs to continue,” Lagarde added.

IMF has expected higher economic growth for China because of the country’s fiscal stimulus. It is the fourth upgrade forecast for China’s economic growth, which is up to 6.8 percent in 2017 and 6.5 percent in 2018.

‘Fixing the roof’

When asked about the “fixing the roof” comment by Wang, Lagarde suggested continuously consolidating financial regulations, gradually tightening financial markets, and trying not to rein in trade.

She warned emerging economies of the risk that a quick tightening of the financial markets would result in capital outflows and spillovers to the rest of the world, and then backfire into their own economy.

Lagarde noted a pickup of trade fueled growth for the last 30 years, and that trying to rein or reduce trade would not be helpful for the roof which is currently being fixed.

Last week, Lagarde highlighted “potential holes” in the world economy including protectionism, political strife, and the tightening of financial institutions, and referred to John F. Kennedy’s famous sentence about the fact that one has to “fix the roof while the sun is shining.”

‘A season of action’

Lagarde said the world is seeing a stronger, but not complete recovery, and is still referencing the three-pronged approach: Monetary, fiscal and structural reforms.

IMF has put its forecast for the world economy at 3.6 percent in 2017 and 3.7 percent in 2018, both 0.1 percentage points higher than its July projection and much higher than 3.2 percent in 2016.

However, there are growing political tensions in many places and increased skepticism about the benefits of globalization, according to Lagarde.

“There is a certain degree of harmony in global economic growth…But certainly our goal is to turn that harmony that we see into a season of action,” said Lagarde.