Speech

Opening Remarks by Rodrigo de Rato, Managing Director, International Monetary Fund

March 15, 2005

Good afternoon. Thank you very much for joining me today. This is the first stop on my two-country visit to the region. From China, I will fly on tomorrow to India. I am, of course, very happy to be here in Shanghai on this, my second trip to China as Managing Director of the IMF.

It is fitting that I am talking to you in Shanghai, China's financial center, because a purpose of my visit was this morning's meeting of the IMF's Capital Markets Consultative Group. The group was set up in 2000 to provide an additional channel of communication between the capital markets and the Fund. At today's meeting, we were joined by executives from Asian financial institutions—including from China—for a very informative discussion that will enhance the Fund's understanding of this region and its capital markets.

This evening, I will have dinner with Governor Zhou of the People's Bank of China. The IMF and the Chinese government have long engaged in discussions of issues crucial to China and the global economy. Our conversation tonight comes against a backdrop of solid global growth that the IMF expects will continue during 2005—with much of the growth coming as a result of the strength of the U.S. and Chinese economies.

Indeed, China continues to experience a strong expansion that has been somewhat tempered by the appropriate efforts of the authorities to rein in excessive investment and inflationary pressures. It is important that this policy of restraint be maintained through 2005.

While continued growth in the U.S. and China is essential, going forward it will be important to achieve more balanced global growth by unlocking the potential of all regions, especially Europe and Japan. For Europe, that requires a renewed commitment to structural reforms to improve medium-term performance. For Japan, it is essential to continue with the corporate and financial sector reforms to ensure that its economy emerges from deflation and achieves sustained economic growth. Faster growth in Europe and Japan can also contribute to an orderly and gradual unwinding of global current account imbalances.

Successfully resolving global imbalances will require all regions to play their part, including the U.S., and China, and other emerging market economies in Asia. We are all aware of the large U.S. current account and budget deficits. Over time, these deficits will not be sustainable. Thus, it is important for the U.S. to embark on a fiscal consolidation course that will place these deficits on a sustainable path.

Meanwhile, in China and some of the other Asian emerging market economies, steps toward greater exchange rate flexibility, supported by continued financial sector reforms, also have a role to play. A gradual move towards exchange rate flexibility will be very much in China's own interest. It will give China more control over its monetary policy. It will increase the Chinese economy's resilience to external and domestic shocks. And it will smooth the adjustment to the major structural changes underway in China. Increased exchange rate flexibility is good for China, and it will also be good for the world economy.

The Chinese authorities also see the benefit of moving toward greater flexilibity over time—although there are differences in views of when would be appropriate to start moving in that direction. Still, I note the statement of the Premier yesterday at his press conference that China is studying a plan to move toward a more flexible exchange rate. We certainly agree with that objective.

Now I will be happy to answer your questions.