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Transformation of China's economic growth pattern important to world, IMF executive says

Jun 10, 2011 Trade

Acting Managing Director of the International Monetary Fund (IMF) John Lipsky said Thursday that the transformation of China's economic growth pattern is important to the rest of the world.

China's economy would continue to be a "bright spot" for global growth and the IMF maintains its forecast for China to grow around 9.5 percent for both this year and next, Lipsky said.

He also expects inflation, which has stood above five percent for several months, to slow to around four percent by year-end, as many key drivers of inflation may soon start to dissipate.

However, he said uncertainties remain, because higher global commodity prices and weather-related shocks to food prices in China's central and southern provinces may create upward pressure on consumer prices.

On China's monetary policies, Lipsky suggested a more balanced use of monetary tools, including more reliance on interest rates and less use of direct administrative limits on loan growth.

A more balanced use of monetary tools would help achieve the objectives of supporting growth while improving the economy's balance more effectively, he said.

China's measures to cool its runaway property market have taken effect. However, the country still has a propensity for rapid rises in home prices, due to high savings, cheap financing, low carrying costs, and the lack of alternative investment instruments, he said.

Lipsky noted that the durable solution for creating a better balance in the property sector is to push forward the development of financial sector, a higher and more appropriate cost of capital and improved property taxation.

A re-balancing of China's economy from an export-dependent model to be domestic demand driven is critical for the stability and growth of the world economy, he said.

China is rapidly evolving beyond its role as a processor that responds to demand elsewhere to become a source of final demand growth. The trend is part of China's economic rebalancing, he added.

Lipsky said the country's 12th Five-Year Plan (2011-2015) shows its determination to prevent a renewed expansion of its current surplus. In the plan, the government pledges to further strengthen the social safety net, rationalize the cost of capital, energy, and other factors of production and find ways to increase household incomes.

He also stressed the importance of the reform and liberalization of the financial system. "A strengthened financial system would help to transform China's growth model toward a more inclusive economy that is focused on improving people's standard of living," he said.

China should strengthen its monetary policy framework, improve regulatory, supervision and financial stability framework, deepen and develop financial markets, deregulate loan and deposit interest rates, and eventually move toward the longer-term goal of an open capital account with the renminbi as a fully convertible currency, Lipsky said.

Further, he said he is confident the IMF will choose an effective, energetic and experienced leader, while adding that the selection will be open, transparent and merit-based and the result will be disclosed by June 30.