Transcript

Transcript of a Press Conference on the International Monetary Fund's World Economic Outlook and Global Financial Stability Report Updates with Olivier Blanchard, Economic Counsellor and Director of Research, and José Viñals, Financial Counsellor and Director of the Monetary and Capital Markets Department, with Caroline Atkinson, Director of External Relations

July 8, 2010

MS. ATKINSON: Good morning, everybody, and welcome to this, the first of the International Monetary Fund’s launches abroad of the updates of our global flagship publications, the World Economic Outlook and the Global Financial Stability Report, which we are updating here in Hong Kong this morning.

It is the first time that we have launched and unveiled these updates outside Washington DC, and it has special significance for us to be doing this in Asia, which is leading the global economy and the global recovery.

We're in the region, in part, to listen to and learn from Asia's successes in economic management, and Asia's role in the global economy and in global institutions, including the International Monetary Fund. We'll be continuing this dialogue in the days ahead in the Asia 21 conference, which the IMF is jointly hosting with the Korean government in Daejeon, near Seoul, Korea.

Before we start, I want to thank very much our hosts here at the HKMA and in particular chief executive Norman Chan and his excellent staff. I may mention Linda Tse and others who have been extremely helpful in setting up this briefing.

We are, as has become usual in our briefings, also connected online and invite journalists who are watching on our webcast to submit questions through our Online Media Briefing Center. This is a live briefing and when you want to ask questions, please raises your hands. I will call on one of you, and if you could identify yourselves and your news organization, then we will take the questions.

With that, I will introduce the panel and then hand over to the economic and financial counsellors. At the far end is Mr. Peter Dattels, who works in our Monetary and Capital Markets Department; then Financial Counsellor José Viñals; the Economic Counsellor Olivier Blanchard; and to my right, Jorg Decressin of our Research Department.

I will now hand over for introductory remarks to, first, Mr. Viñals, and then Mr. Blanchard. José.

MR. VIÑALS: Thank you very much, Caroline, and good morning to all of you. Let me start by saying that it is a real pleasure to be here in Asia to present to you our views on global financial stability, particularly in this very special setting of Hong Kong, as this is the first time that we have done so outside of Washington.

Having withstood the crisis with a vibrant and resilient financial system, Asia is well-placed to provide momentum for a rapid global recovery and it is thus fitting that we should present our latest assessment of the financial and economic conditions here in Asia, and more particularly in Hong Kong.

Now, let me start by giving you our two key messages and then I will elaborate on them. The first message is that unfortunately global financial stability has experienced a setback in recent months. Sovereign credit risks in parts of the Euro area have materialized and have spread to the financial sector there, threatening to spill over to other regioons and re-establish the adverse feedback loop within the economy.

While, as Olivier Blanchard will discuss later on, the effects on the real economy have been limited so far, these financial developments in Europe present clear dangers and raise serious policy challenges. Indeed, important national and supernational policy initiatives have already been taken in response to these challenges.

And the second key message that I have for you is that further follow-up is needed in the policy front to bolster confidence in the financial system and to avoid that the crisis enters into a new phrase that could hurt the global economic recovery, a recovery which is well under way here in Asia where the impact of the current bout of financial instability has so far been limited.

So in the rest of my remarks, I will elaborate on the two key messages I've mentioned. First I would say a few words about where we stand now concerning global financial stability, and then on what must be done in order to further underpin and support financial stability.

On where we stand, as I mentioned, the current shock to confidence and to financial stability emanates from parts of the Euro area where the transmission of sovereign credit risk linked to very high public debt levels has so far been primarily financial in nature and generally contained within the region.

These spillovers on the financial system have led to significant interbank funding weaknesses, with the new uncertainties about banks' exposures to sovereign risks exacerbating the existing concern about remaining legacy problems in the banking system. And I think this is very important.

We have legacy problems in terms of the quality of assets in our banks as a result of the first part of the crisis and now these problems are compounded by the exposure to sovereign risks and uncertainties linked to this second phase of the crisis.

Banks in the Euro area mostly are no longer willing to lend to each other for longer than a few weeks, causing long-term interbank spreads to widen again. To alleviate these funding strengths, the European Central Bank has reintroduced some flexibility into its liquidity operations, further increasing the prominence of its role in the interbank market.

Reinstating the foreign exchange swap line by the Federal Reserve has helped contain dollar funding strengths experienced by European banks, and this is something which is important for certain Asian markets as well, where European banks are significant providers of dollar liquidity.

In any case, let me emphasize that domestic liquidity conditions here in Asia have remained generally calm thanks in large part to the limited reliance of Asian banks on wholesale funding, and their comfortable liquidity levels.

Now, while the current transmission of sovereign stress has been primarily financial in nature, the possibility of adverse feedback loops on the economy having an adverse impact on the economy has risen. Why is that? Well, bank funding pressures. The more difficult it is now for banks to obtain money on easy financial terms could accelerate the ongoing deleveraging process, particularly as banks compete with the public sector for new funds. As you know, the public sector now has to issue a lot of bonds in order to meet their very important financing needs which are derived from high deficits.

So it is too early to tell if these increased demands from the public sector will crowd out the funding needs of Euro area banks and if actual bank lending growth will worsen in the Euro area. But certainly this is a concern going forward.

Now, how is all this affecting emerging markets? Well, the most obvious effect has been a slowdown in portfolio capital inflows, which is not altogether unwelcome at this juncture given our earlier concerns about very rapid capital inflows going from advanced economies into emerging markets.

However, it's fair to say that this retrenchment in portfolio inflows has been reflected in volatility in equity markets and also in the fact that sovereign and corporate bond issuance has also stalled, although Asian issuance and the spreads at which Asian issuers have placed their paper in the market have not deteriorated as dramatically as elsewhere.

Not surprisingly, the spillovers on emerging markets have been felt the most in the emerging European countries where direct linkages with mature European economies are the greatest.

So far, these are my messages in terms of where we stand. Now, what should be done in order to support financial stability? So let me turn now to the policy messages.

The general idea is that continued and decisive policy action is critical to restore confidence and to further underpin financial stability, which is also very important to keep the global economic recovery on track. For that, there are policy actions which are needed on three broad fronts.

First, because the root of the problem is sovereign credit risk, sovereign credit risk must be addressed. You need to address the problem in the public finances which is behind this concern on the sovereign. And for that, credible fiscal consolidation plans are necessary, together with better strategies for public debt management.

Where needed, these fiscal consolidation strategies should be coupled with growth-enhancing structural reform in order to have a growth-friendly fiscal consolidation process.

I will stop here on this, because this is something that Mr. Blanchard will develop in a moment. But let me just say that this agenda of fiscal consolidation is particularly relevant for the Euro area but not just for the Euro area, because this is an issue for many advanced economies and also for a number of emerging markets.

Second, measures are needed to fully stabilize the financial system. Together with the policy initiatives that have already been taken in the European Union, both at the national level and at the supernational level, there is a need for more transparency regarding the situation of individual banks, and I think it is very welcome that the European authorities have decided to release the stress tests concerning about 91 European banks, which represent about 65 percent of the total banking system in the European Union.

But of course, together with the transparency which comes associated with a disclosure of the results of these stress tests, you must have ready solutions to deal with weak banks, solutions that should come at the national level but if needed, should also be helped by mechanisms provided at the supernational level in Europe.

So in this regard, the European financial stability facility should be made fully operational, and where needed, should be applied also to address banking problems. In turn, central banks should continue providing the necessary support or be ready to reintroduce whatever policy actions are required to preserve orderly liquidity conditions and functional financial markets, and this of course is very important in the Euro area but outside of the Euro area, central banks also have to be ready to play their part if the need arises.

At the global level, it is also crucial to move expeditiously to provide further clarity on the details and timing of intended regulatory reform. So it is very important that as soon as possible, we get clarity on the rules that are going to govern the behavior of banks and financial institutions.

By the way, in addition to good rules, it is crucial that we complement them with strong supervision, basically with strong enforcement of the rules. This applies in the steady state but even more so during the transition period in which the rules are going to be put in place, where there may be differences in the implementation during the transition of the new rules between national jurisdictions.

The third area for policy actions concerns emerging market economies, which need to address the challenges associated with capital flows in terms of both high volatility and possibly greater trend influence.

Olivier Blanchard will expand further on the macroeconomic aspects of this, but in addition to the need for emerging markets to pursue sound macroeconomic policies, from a financial sector perspective, it would also be important to pursue adequate prudential policies as well as to promote measures to enhance the resilience of the local financial systems. The latter should focus on the development local capital markets, in upgrading capital market infrastructures to further enhance the capacity to intermediate capital inflows and outflows so as to deal with sudden stops without excessive volatility.

A number of Asian economies have already introduced prudential measures that have helped contain the effects of strong capital inflows on asset markets. Countries such as, for example, China, Hong Kong SAR, and Singapore, have also introduced prudential measures that have dampened real estate price increases and the share of real estate loans in new bank lending.

So to conclude, as I have explained, recent global financial stability gains which we had been having since the beginning of April, are threatened at present by a confluence of sovereign and banking risks which are mainly emanating from the Euro area and which, without concerted attention, could spill over to other regions and stall the global economic recovery. Thus further credible and decisive policy action is needed to resume progress on financial stability and keep the economic recovery on track.

Thank you very much.

MS. ATKINSON: Thank you, José. Now to Olivier Blanchard, economic counsellor.

MR. BLANCHARD: Good morning. Let me join Caroline and José in thanking our hosts for such a generous and incredibly efficient organization. We're very happy to be here.

Let me turn to the macroeconomic picture. The macroeconomic forecast in the World Economic Outlook update reflects two opposing forces. If you look back, say, to the first half of the year, the numbers about economic activity have come in strong, indeed somewhat stronger than we had forecast. So based on this, you would tend be a bit more optimistic than you were, say, three months ago.

But looking forward, however, storm clouds have appeared on the horizon. They have just been discussed by José Viñals, and they present real dangers, serious policy challenges, and other things equally give us reasons to be less optimistic than we were three months ago.

Assessing the balance of these two forces is clearly a very difficult exercise. At this stage we think that the result will be roughly that they cancel out. Let me give you more specific numbers. Our forecast for world growth in 2010 is 4.5 per cent, so slightly higher than our April forecast, but the revision largely reflects the stronger activity during the first half of the year. So things which have already happened.

Our forecast for 2011 is unchanged at 4.25 per cent. Now, as always, these world growth rates which we give you hide the large difference between and within advanced and emerging and developing countries.

So let me give you a few more facts here. Our growth forecast for advanced countries is 2.6 per cent for 2010, and 2.4 per cent for 2011. Now, these are low growth rates. They have one implication, which is that high unemployment will remain an important aspect of advanced economies for quite a while, for some time to come.

Turning to emerging and developing economies, the numbers are much higher. We have 6.8 per cent for 2010; 6.4 per cent in 2011. That's an upward revision of 0.5 per cent for 2010 -- again, largely reflecting things which have already happened; and a small downward revision of 0.1 per cent for 2011.

What I want to do now is develop these two themes. The first one is the continuing recovery, and the other is clouds on the horizon.

So, continuing the recovery. The world economy expanded at an annualized rate of over 5 percent in the first quarter of 2010. Growth was stronger than expected in most countries, including the United States, Europe, Japan, Brazil and India. And in most cases, it reflected stronger private demand which is a very good sign for the future, as this is what growth should be based on or built on.

The most recent indicators in the last few weeks suggest some slowdown of demand, but it is too early to assess how significant this slowdown may be.

Turning to the clouds, the other theme, the clouds started building over Greece but quickly extended to Europe and threatened to cover the entire global economy. Worries about fiscal solvency in Greece turned into worries about fiscal solvency nearly everywhere. Worries about fiscal solvency have triggered worries about the solvency of banks. These in turn have led to financial turbulence, disruptions in market financing and a freeze in the interbank markets in Europe.

These evolutions and the policy responses from the European Union, the European Central Bank, and the International Monetary Fund, have been discussed by Mr. Viñals already.

Our baseline forecasts are constructed under the assumption that the policy responses will be adequate and will limit the effects on the real economy. However, even in this case, they are likely to have four main macro implications, and let me list them.

The first that we have already observed is the depreciation of the euro. The second is a tightening of bank lending, especially but perhaps not only in Europe. The third is a need for fiscal consolidation which, even if it is well executed, is likely to affect demand and growth adversely in the short run. And the fourth is a near-term reallocation of capital flows.

So for the rest of my remarks, I want to focus on the last two implications: fiscal consolidation on the one hand, and capital flows on the other.

The current policy focus in advanced countries is to put in place fiscal consolidation plans. While fiscal stimulus was absolutely necessary to stem a potentially catastrophic collapse of output in 2008 and 2009, countries must now return to a sustainable fiscal path and the difficult question, as you well know, is when and at what speed?

Now, we believe that the key here is to put in place a credible road map to stabilize the ratio of debt to GDP over the medium term -- say, five years -- with the goal of decreasing it substantially over the longer term. In fact, at the recent G-20 summit in Toronto, advanced economies committed to fiscal plans that will stabilize or reduce government debt to GDP ratios by 2016. This is roughly in line with our recommendations.

The question is how you achieve credibility, and we think that credibility can be achieved in two ways. The first one is by passing reforms which improve the medium- and the long-term outlook. An example of those would be increases in the retirement age in line of the increase in life expectancy; and the second way is in putting in place fiscal rules such as limits on the growth of spending over time. These rules have shown that they can work.

When should the adjustment start? Well, the adjustment should start soon but too much front-loading, too sharp a cut in deficits this year or next year, would be counterproductive. The recovery in advanced economies is still fragile and monetary policy which is already very accumulative cannot yet be used to significantly offset the adverse effects of fiscal consolidation on demand.

So the current plans for 2011, which imply an average decrease in the cyclically adjusted deficit in advanced G-20 countries of about 1.25 percent strike us as roughly appropriate. However, what are still missing from the fiscal plans in many countries are ambitious reforms to entitlement systems and, in many cases, better fiscal growth.

Let me turn to the last topic of my remarks, which is capital flows. Before problems in Europe came to the fore, capital flows to emerging market countries were steadily increasing. Events in Europe have led, as José Viñals mentioned, to a partial reversal. While fiscal worries in advanced countries have made emerging market countries relatively more appealing to investors, higher risk aversion in general has led them to repatriate funds home, leading to a decrease in the capital flows to the emerging markets.

Now, the question is how long this decrease will last. We expect this decrease and this reversal to be temporary, and I think that the future is such that it will be a trend of strong capital flows returning to emerging market countries.

These inflows present emerging market countries with a very difficult challenge, which is how to handle them, and two considerations are important here.

The first is that these flows are largely driven by good fundamentals and likely to be long-lasting. Limiting their overall size through controls of fighting the effect on the exchange rate through reserve accumulation may prove difficult and eventually self-defeating.

The second aspect, which is important, is that many emerging market countries would benefit from a shift from external to internal demand. This would allow them to maintain growth in the face of lower exports to the advanced countries, as well as to better satisfy their domestic needs. Now, to achieve this requires both structural reform and exchange rate depreciation. In this respect, the decisions by China to boost internal demand and allow for more flexibility of the yuan are very welcome.

Let me summarize. While we remain cautiously optimistic about the pace of recovery, there are clear dangers and policy changes ahead. How Europe deals with fiscal and financial problems, how advanced countries proceed with fiscal consolidation, how emerging countries rebalance their economies, will very much determine the outcome for this year and next year. Thank you.

MS. ATKINSON: Thank you very much. I'd just like to remind the press that is watching, media that are watching this briefing online, that you can submit questions through our Online Media Briefing Center and also I will turn to questions from the room. Please raise your hands if you'd like to ask a question and then identify yourselves and your news organization. There's a gentleman in the front row on the left.

QUESTION: You talked about capital flows, the slowdown being temporary. Is there a chance that the extended very easy liquidity in Europe will in fact create another tidal wave of liquidity coming to places like Asia, sort of like what we saw after the most recent crisis?

MR. BLANCHARD: I think that before the European events took place, so before May, there was a steady increase in capital flows. They were not yet back at the level that they were at pre-crisis, but they were coming back. My sense is indeed what we have seen is a temporary reversal. We'll go back, I think, to fairly high capital inflows into emerging market countries and the issues I raised at the end of my remarks come to the fore, how is that these countries will have to think about how they handle that.

MS. ATKINSON: Thank you very much. We have a question online again for Olivier Blanchard. "What are the risks of a double-dip recession and what scenario would have to occur for this to happen?"

MR. BLANCHARD: As I have said, the baseline forecast that we have nothing like a double dip. They have fairly strong world growth and they have decent -- not great, but decent -- growth for advanced countries. So this is our baseline scenario and therefore it doesn't include the double dip.

Are there events which could lead to a double dip? Some of the risks that José Viñals has mentioned, which would be deterioration of fiscal and financial conditions, increased financial turbulence in Europe, might well lead to a double dip, at least in Europe. I share his view that the policy measures which have been taken make this scenario very unlikely but surely not impossible.

MS. ATKINSON: Thank you. Other questions? Raise your hand if you have a question from inside the room. We have a question [online]. "Could fiscal consolidation overwhelm economic recovery and if so, what then?" Olivier?

MR. BLANCHARD: Yes. Again, we all understand that fiscal consolidation has to be done at the right pace, and the important thing here is to have a medium-term plan, namely a plan which is consistent and gets us back to fiscal sustainability and lower debt to GDP over a number of years. There is clearly a danger that too much front-loading at the beginning might derail the recovery. Our sense, as I said in my remarks, is that the current plans adopted by the advanced countries are such that the risk is not very high, that they are proceeding at the right pace and therefore this will not derail the recovery.

MS. ATKINSON: Thank you. "Are you satisfied with the recent change in China's currency policy, and does it appear to be allowing sufficient flexibility for the yuan against the dollar and other currencies?" Again, Olivier.

MR. BLANCHARD: I'm afraid that's me again.

MS. ATKINSON: Yes, I'm afraid so. Maybe --

MR. BLANCHARD: For a long time, we have argued that China should think about rebalancing its economy, moving somewhat away from external demand and towards internal demand, and I think this is a diagnosis which is fully shared by the Chinese authorities. Now, a number of things have to be done for this to happen successfully, namely so as to maintain high growth.

One is basically to give incentives to domestic producers to turn to internal demand, and another is to change relative price of domestic and foreign goods, and that's an appreciation of the yuan.

We think that together, all the measures which are now in play would lead to rebalancing in China. At what rate it will happen remains to be seen, but we feel that the Chinese authorities are very much going in the right direction.

MS. ATKINSON: Thank you very much. Here in the back, the gentleman with the blue shirt.

QUESTION: Thank you. I find your last remarks a bit strange here. You're saying China's going in the right direction but its growth last year was achieved with an enormous expansion of bank credit and enormous expansion in investment, and in fact we've seen the economy shift more heavily towards investment and away from consumption.

So, two points to this question: how is this heading in the right direction, and secondly, given this enormous expansion in bank credits -- something like 30 per cent of GDP -- are you concerned for the stability of the Chinese banking system?

MS. ATKINSON: Perhaps we'll turn that question first to José Viñals on the banking system.

MR. VIÑALS: I will take up that part of the question and leave the other one for Olivier.

On the stability of the banking system, as you may know, we have started our Financial Sector Assessment Program with China, which means that this is an in-depth check-up of the health of the financial system in China in that the next few months will allow us to have an intimate knowledge of what's going on in the banking system.

But let me tell you that the rapid growth of bank credit has been something which has been under scrutiny on the part of the Chinese authorities. These authorities have already enhanced, intensified, their regulatory and supervisory measures in order to be on top of the situation and to minimize any potential impact that this growth of credit may have on the quality of the loans going forward.

MR. BLANCHARD: Let me take the part about investment and consumption.

MS. ATKINSON: Yes, please.

MR. BLANCHARD: When the world crisis started, China saw a large decrease in exports, which it had to compensate in some way. It did this through a very strong fiscal stimulus program, which was largely oriented towards investment. The reason I think for this is it was relatively easy to mobilize resources at that margin and therefore to increase spending at that margin.

As time passes, the Chinese government is trying to reallocate its effort from encouraging investment, which was the right way to do it in 2009, to increasing consumption. However, the measures which are needed to increase consumption in China are not measures which are easy to design, easy to implement, and have effects very quickly. If you want to improve social insurance, it takes some time.

So I think what we are seeing and what we're going to see more of is a reallocation of internal demand from investment to consumption, which is very desirable.

MS. ATKINSON: Thank you very much.

QUESTION: I have a question about the stress test in Europe now. What do you expect the result would be, and do you think the test is adequate to prove that the bank is doing okay in Europe, and what else should be done for the banks in Europe? Thank you.

MS. ATKINSON: Thank you. Again, for José.

MR. VIÑALS: I think that the decision that has been made by the European authorities to disclose the stress tests corresponding to 91 banks, which account for at least 65 per cent of the total banking system in the European Union and which in each country account for at least half of the size of the total banking system, is a very important step to enhance transparency.

It is very important because you have a lot of institutions covered, so you have the bulk of the European banking system. It is very important because of the shocks that you are inducing in the stress test. You're using macroeconomic adverse scenarios, and you're also using sovereign risk scenarios. And I think that the disclosure of these results would be important.

Now, I cannot anticipate what will happen. We'll have to wait until we read the specific results. But as I mentioned, something which is very important for this exercise to bolster confidence is as this exercise in transparency is coupled with the immediate announcement of the measures that will be taken for those banks which are not passing the stress tests, so that whenever there is a problem, there is also a solution ready. And this is very important.

In the case of the United States, when the U.S. authorities perform the so-called, U.S. stress test [inaudible] they announced the results for the banks and also a solution for whichever banks were not passing the tests, and this is something that was very good for market confidence.

So I think that this is a useful lesson and in the European case, both the disclosure and the solutions should be provided.

MS. ATKINSON: Thank you. Other questions in the room? Thank you, this gentleman here.

QUESTION: Hello. I'd like to know, do you think the fees for consolidation in developed market will affect the investment and does that mean the capital flow in the second half of this year? Thank you.

MS. ATKINSON: Do you want to specify a region? Do you mean for the Asian region or –

QUESTION: The Asian region. For example, the emerging market.

MR. BLANCHARD: I'll have a go. I'm not sure I got your question entirely. But to the extent that fiscal programs which are announced are credible and start being implemented, I think that some of the uncertainty which is affecting investors will decrease. I think when this happens, we'll see a stabilization of capital flows.

MS. ATKINSON: Thank you.

MR. VIÑALS: May I add on this in a marginal tone, that insofar as fiscal consolidation, it's something that investors are looking at in order to restore their confidence. That's something which is going to be good for everything. It is going to be good for capital flows, it is going to be good for stock markets, and it’s going to be good for banks. It's going to be good across the board, and not just for advanced economies but also for emerging markets. So I think that this is a win-win situation.

MS. ATKINSON: Thank you. We have a question online, "Would you support moves to depreciate the yen in order to counter deflation in Japan?" I think that's for Olivier.

MR. BLANCHARD: I will just make one remark and then maybe leave the floor to Jorg.

Our assessment is that the yen at this stage is roughly correctly valued. It's roughly in line with fundamentals and therefore we do not think that the depreciation of the yen is needed at this point.

MR. DECRESSIN: In our view, monetary policy in Japan is presently appropriate and we expect deflationary pressures to ease. Should that not be the case then there are other ways to combat inflation through more extensive interventions by the bank of Japan. For example, you know, extending the terms of maturity to over six months of the funds that the Bank of Japan is supplying, or for the bank of Japan to purchase a wider range of assets. In other words, there are other ways to go about fighting deflation rather than a yen depreciation.

MS. ATKINSON: Thank you very much. Here at the back?

QUESTION: Thanks very much. Perhaps a couple of questions for Mr. Blanchard. I know you might have covered it in your written remarks but can you explain about your reasons for adjusting upwards the forecast for the Chinese economy expansion this year, and why you're downward-adjusting the one for next year? Can you explain a bit the risks faced by the Chinese government going forward.

And in case you do have answers for my second question, on the Hong Kong economy, is there any adjustments for the Hong Kong SAR economy going forward? Thanks very much.

MS. ATKINSON: Thank you. Olivier?

MR. BLANCHARD: In China, there was a much stronger first-quarter growth than what we had expected and that has led us to revise up the first half of this year. But then we expect, actually, because of a general slowdown in the pace of growth which is very high for the moment, we expect that then to lower the growth rates in the second half. But there's still overall an increase in our projections by about 0.5 per cent.

Now, where does this growth come from presently? You see very strong retail sales, for example, related to that strong consumption growth and also strong investment growth. But as I said, in the second half of the year this will weaken and this will then carry over to the next year where we see slightly lower growth than what we have this year and what we had originally projected. But still, you shouldn't forget next year the growth rate we forecast is 9.6 per cent, which is pretty high.

Now, as to your question on Hong Kong, we are seeing growth in Hong Kong for this year at around 6 per cent, which is 1 per cent higher than what we had in the April WEO forecast, and for next year we see it at around 4.5 per cent, which is unchanged from the April WEO forecast.

Again, the story here is similar to that for China. A much stronger first quarter boosts the growth rates of the first half of this year, but then with the Euro turmoil and the global manufacturing cycle cooling down somewhat from its red-hot pace, growth will diminish during the second half of the year but still on average it leads us to revise up by 1 per cent for this year.

MS. ATKINSON: Thank you. Here in the front?

QUESTION: I'm just wondering the more flexible yuan, is there any impact on the capital flow in the region? I mean in Asia.

MS. ATKINSON: Whether the more flexible yuan will have an impact on capital flows in the region?

MR. BLANCHARD: I think it's too early to tell. At this stage access to China's financial markets is still not open so we're not going to see an enormous amount of capital flowing to China. Clearly this happens, then this will reallocate capital flows within the region, increase them in China and have an effect on other Asian countries. But I think it's just too early to tell.

MS. ATKINSON: Thank you. In the back?

QUESTION: Thank you very much. Nine months ago the Fund was concerned about the risk of asset bubbles in Hong Kong, particularly in the property market. Has that risk now disappeared?

MS. ATKINSON: Again, José and then Jorg?

MR. VIÑALS: Let me say something and then perhaps there can be a complement.

I think that what we have observed in the recent months is a reduction of the tensions in asset markets in general in Asia. You have had a correction in equity markets and you have had a sort of cooling of some of the tensions you had in property markets. That has been evident in countries like Singapore, it's been evident in countries like China. You know, in Hong Kong, some of the measures that have been taken by the domestic authorities also are expected to be working. So you have to give some time for these measures to work.

But I feel that if you look, for example, at the growth of transactions volume in the real estate markets for the main Asian markets, those have come down significantly and if you look also at the proportion of the real estate loans which are provided as a fraction of the total loans provided by the banking system, this fraction has also come down in a number of Asian countries.

MS. ATKINSON: Thank you very much. Any more questions in the room? And if not, then I'd just say thank you very much to all of you. Thanks again to the Hong Kong Monetary Authority and to Mr. Blanchard and Mr. Viñals.