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Lagarde sees China determined to move forward

IMF managing director suggests Japan lift consumption tax bit by bit

Christine Lagarde, managing director of the International Monetary Fund, speaks to The Nikkei in Tokyo on Nov. 8. (Photo by Hiroyuki Kobayashi)

TOKYO -- Although China's market-liberalization efforts have been rather muted since 2015, when the International Monetary Fund announced it would add the yuan to its Special Drawing Rights basket, IMF Managing Director Christine Lagarde on Wednesday said Beijing remains on the right course.

"The political will to have that currency included is certainly a signal that there is no way back, only a way forward," Lagarde said during an exclusive interview with The Nikkei. "The Chinese authorities have done what was necessary and continue to do so."

In solidifying his power base at last month's national congress, Chinese President Xi Jinping could end up leading China away from an internationalized currency and an open market. But Lagarde's faith in China remains unwavering. Joining the SDR, she said, "indicates firm determination to go in that direction and ultimately to open the capital account."

In November 2015, the IMF announced it would add the yuan to its SDR basket, which also includes the dollar, euro, yen and British pound. The basket is meant to provide added liquidity tInto the global financial system.

During the interview, Legarde diagnosed the global economy. For 2018, she said, the IMF expects global growth to be around 3.7%, 0.5 of a percentage point higher than in 2016 and in line with what global growth averaged before the financial crisis struck in the fall of 2008. Lagarde attributed the higher growth to improved demand in most advanced economies, continued fiscal stimulus in China and emerging market recoveries.

Around the world, stock markets are on a bull run, thanks to robust economies and accommodative monetary policies. But Zhou Xiaochuan, the governor of the People's Bank of China, recently hinted at the specter of a "Minsky moment" -- a sudden collapse of asset prices that follows a long period of growth.

Lagarde is aware of the risk. "Capital asset overvaluation is not occurring now," she said. "But those risks need to be watched by supervisors, by those that have the abilities to take macro-financial measures and macro-prudential measures to actually anticipate and limit the risk."

Lagarde had a policy proposal for Japan. Before last month's lower house elections, Prime Minister Shinzo Abe reaffirmed his plan to hike the consumption tax by 2 percentage points in 2019 but also said he would no longer target 2020 for achieving a primary balance surplus.

After praising Abe's decisions as realistic and courageous, Lagarde said, "Our recommendation is to not necessarily go up abruptly by 2% in 2019 but to move gradually in order not to shock the growth movements that are seen in Japan." She suggested a series of hikes of half or 1 percentage point.

"In addition to that," she said, "it would be helpful to actually set a medium term framework that would indicate determination to consolidate."

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