By Christine Lagarde*
[ This is a speech given at Fudan University, Shanghai on March 20, 2015. ]
Good afternoon – Xia Wu hao!
I would like to thank Professor XU Ningsheng, President of Fudan University, and Professor LU Xiongwen, Dean of the School of Management, for their kind invitation and introduction. And thank you to the entire faculty and to you – the students – for your warm welcome.
It is a great pleasure to be here at Fudan University, one of the oldest and best universities in China – and one of the most beautifully named academic institutions in the world.
The two Chinese characters, Fu (復) and Dan (旦), literally mean: “heavenly light shines day after day”. This encapsulates the perennial quest for academic excellence: you get up; you study hard, day after day, to achieve your goals. It is also an image of renewal, hope, and harmony.
These are some of the qualities that China can bring to the global economy – a global economy that continues to be weighed down by low growth, high debt, and high unemployment. The world needs a thriving Chinese economy, and China needs a thriving global economy.
This harmony of interests needs to be nurtured, day after day, through global cooperation, national efforts, and individual contributions – your contributions as future leaders of China. This is what I would like to discuss with you today.
But before I delve into our discussion, I would like to share with you a little secret: I have a weakness for Chinese tea, especially green and black teas.
Chinese tea culture connects ancient traditions with the rituals of modern life. It connects the sublime and discerning that we reserve for special occasions with the simple pleasures that we all need during a long day of work or study. This is what I admire; this is what I am always looking forward to when I visit China.
So why is my humble cup of tea relevant right now? Because running an economy is akin to brewing an exquisite cup of Chinese tea – both require impeccable timing and a delicate mix of ingredients.
With this in mind, I would like to discuss three topics:
• What are the ingredients for global growth?
• What are the ingredients for China’s economic growth?
• And what are the ingredients for your own success?
1. Ingredients for global growth
Let me begin with the global economic cup of tea. More than six years after the start of the global financial crisis, we are still feeling its bitter aftertaste.
High debt and high unemployment are the bitter legacies of this crisis, and too many countries are still struggling to overcome them. Too many companies and households are still cutting back on investment and consumption because they are concerned about low future growth.
These lingering weaknesses have held back the global recovery. The IMF recently cut its global growth forecasts for both 2015 and 2016 (to 3.5% and 3.7%) – despite the boost from cheaper oil and stronger U.S. growth.
The recovery remains fragile because of significant risks. One such risk emanates from the expected tightening of U.S. monetary policy at a time when most other countries are easing monetary conditions. If not well managed, this “asynchronous” monetary policy may trigger excessive volatility in global financial markets.
Another risk is the strengthening U.S dollar and its possible impact on emerging market economies. These countries could be vulnerable because many of their banks and companies have sharply increased their borrowing in dollars over the past five years.
A further risk is a prolonged period of low growth and low inflation in Japan and in the Euro Area – although we are beginning to see signs of an improvement in activity and inflation expectations in the Euro Area.
All this points to one thing: the need for a more powerful policy mix. The key ingredient is greater structural reform in allcountries, including China.
For many countries, this means ramping up public investment to expand or fix up vital infrastructure. It means stepping up trade liberalization, and pressing ahead with reforms in education, health, social safety nets, and labor and product markets. It also means unleashing the economic power of millions of women who have been locked out of the labor market.
The G-20 group of leading economies, including China, has put these reforms at the center of its new growth strategy. This initiative is expected to add more than US$2 trillion to the global economy and create millions of new jobs over the next four years. But the plan must now be implemented – country by country, reform by reform.
What does all this mean for China?
Global conditions affect China mostly through trade and commodity prices. For example, stronger U.S. growth is good news for Chinese exports. And cheaper oil increases China’s private demand and the purchasing power of its consumers. The not-so-good news is the prospect of sustained weakness in demand in other emerging markets and in the Euro Area, China’s largest trading partner.
At the same time, China provides much-needed support to the global economy. It has accounted for more than a third of global growth over the past seven years.
But to retain its leading position, China needs to keep reinventing its economic ingredients. This is how China transformed itself in a remarkably short period – from an inward-looking, less-developed economy into the world’s biggest manufacturer and trading nation.
As it grows to become the world’s largest economy, China stands – yet again – on the cusp of another self-transformation – which is my second topic.
2. Ingredients for China’s economic growth
China’s biggest challenge is to avoid getting stuck in what economists call the “middle-income trap”. China is now a middle-income country, and one that is determined to become a high-income country by 2030.
Premier Li Keqiang recently said: “Systemic, institutional, and structural problems have become ‘tigers in the road’ holding up development.” This is why China has launched deep structural reforms to lift incomes and living standards in the long term.
These reforms will lead to a “new normal” of slower, safer, and more sustainable growth. In this context, the IMF forecasts GDP growth of 6.8 percent in 2015 – about half a percentage point less than last year.
Let me be clear: slower, safer, and more sustainable growth is good for China and its people – and it is good for the world. By brewing its economic cup of tea more slowly, China will end up with a richer taste.
The challenges and potential rewards are huge. China has begun a process of rebalancing in multiple dimensions: from investment to consumption; from manufacturing to services; from capital-intensive growth to one that is driven by innovation, higher skills, and technology.
How can you achieve all this? By creating the right conditions and getting the work done.
By preserving economic and financial stability, the government is creating the conditions in which adjustments can unfold safely. For example, credit growth has slowed in the past 12 months, which is helping to contain vulnerabilities in the financial system.
The government is also pressing ahead with ambitious, market-oriented reforms laid out in the Third Plenum blueprint. Let me highlight one key objective – opening up the service sector.
By injecting greater competition into the service sector, China will boost employment, consumption, and living standards. This requires removing barriers for private companies in areas such as finance, education, health, telecom, and logistics. These sectors will offer exciting entrepreneurial opportunities for yourgeneration.
In fact, you can launch your new business right here in Shanghai. This great city has been leading the liberalization of China’s service sector by changing business regulations and encouraging startups. The new Shanghai Pilot Free Trade Zone is a testament to Shanghai’s long tradition of pragmatism, business innovation, and international outlook.
Finance is playing a particularly important role, and not just here in Shanghai. China is now creating a modern financial sector that can channel its vast savings into the most efficient investments – including the start-ups that you will create.
There has been good progress in opening up the financial sector. For example, China has liberalized its lending rates and has made its deposit rates more flexible. The government is also encouraging private investors to establish small and medium-sized banks and other financial institutions.
Maintaining this reform momentum will be essential. This means taking further steps to liberalize the deposit rates and the exchange rate. It means removing implicit government guarantees, especially for state-owned enterprises, to promote better pricing and allocation of credit. It also means developing a greater tolerance of corporate defaults and bankruptcies to create more room for healthy companies to thrive and access credit.
All these reforms are united by a common ingredient – a greater willingness to allow market forces to work. Let them do morework – for you! This will lead to safer, higher-quality growth.
China also needs more sustainable growth.
As with many countries around the world, China’s economic success has come at a price – increasing environmental damage and rising income inequality. This is precisely why China is moving to a development model that will generate greener, more inclusive, and more widely shared growth.
We all know that green is good. But more often than not, Chinese skies are grey. As you all know, air pollution, water pollution, and soil contamination are major challenges. They are not only bad for your health, they are bad for growth.
Clearly, environmental awareness is increasing at all levels of Chinese society, and actions are being taken. China has been stepping up its green policies: from cracking down on industrial pollution to spearheading innovation in renewable energy. It has recently raised gasoline taxes and is considering an environmental protection tax. But there is still a long way to go.
Another long-term challenge is rising income inequality.
China has lifted more than 600 million people out of poverty over the past three decades – an amazing achievement by any standard. But disparities persist between rural and urban regions, coastal and inland areas, and within cities and rural areas.1
IMF studies have shown that excessive income inequality leads to slower and less sustainable growth. Strengthening social safety nets and improving access to education, health care, and financial services can be powerful forces to reduce income inequality. So too can be smart redistributive policies, including more progressive taxation.
What about gender inequality?
China has a strong record of encouraging female entrepreneurship, and many of its most accomplished business leaders are women. Overall, women account for 45 percent of China’s labor force, on par with most advanced economies. But women make up only 25 percent of people in “positions of responsibility,” according to census figures.
This suggests that women are still facing some constraints, particularly in rural areas.
Addressing these obstacles will be good for women and men – and good for China. IMF studies have shown that greater gender equity leads to higher, more sustainable growth.
Here in China, it is often said that “women hold up half the sky”. Your generation will ensure that women also hold up half the economy.
This brings me to my third topic – the ingredients of your success.
3. Ingredients for your success
Your generation has a unique opportunity to bring together individual, national, and global ingredients. What do I mean by that? I mean that you can use your skills to create Chineseproducts and services that have a global impact.
Think of biotech, green technologies, and cutting-edge information systems. Think of the bustling ecosystem of smartphone apps that facilitate your shopping, social interactions, financial transactions, and media consumption. Some 80 per cent of the world’s adult population is expected to own a smartphone by 2020 – and Chinese firms will seize that market opportunity.
Think of opportunities in film, music, video games, and other creative industries. Who would have thought that the world would dance to Korean pop music? China is now beginning to sing its own song for global audiences.
But creating high-end products for global customers requires a global view. Travel, foreign languages, overseas studies, and cross-border cooperation in science and product innovation: these are some of the tools that will help you better understand what makes your future customers and colleagues tick. You will have a chance to learn from others – and have others learn from you.
Above all, you will have a chance to create sustainable ventures that are firmly grounded in mutual trust and strong ethical behavior. Look what has happened to the reputation of bankers in many advanced economies. They are still struggling to rebuild the trust that was broken in the global financial crisis. Some have said that ethical behavior is doing the right thing when no one else is watching – even when doing the wrong thing is legal.
As you are pondering your limitless opportunities as global leaders, you may also want to consider the benefits of failure – of succeeding through trial and error. The theme song of the classic Chinese TV series, Journey to the West, offers some good advice: “Dare to ask where the road is; the road is beneath your feet”.
In other words, keep on trying and testing, and create your ownpath, your own “Chinese dream”!
So what can the IMF do for you?
I encourage all of you to consider joining the IMF. You will discover that the IMF is one of those places that bring together global, national, and individual ingredients. And you will be in good company: 140 Chinese nationals are already making their mark at the IMF, including 8 graduates of Fudan University. And we continue to recruit Chinese graduates into our Economist Program and at mid-career levels.
At all levels, including senior management, Chinese nationals are helping the IMF to achieve its mission – to preserve global economic and financial stability. I am particularly grateful to Deputy Managing Director Min Zhu, a graduate of Fudan University, for his wisdom and dedication, and to Jianhai Lin, Director of the department that supports our Executive Board representing 188 member countries.
The IMF is the premier forum for economic cooperation in the world today. We do this through annual check-ups of every country’s economy – we call this “surveillance” – and through lending to countries in times of crisis. We also work very closely with our members to bolster their capacity and resilience through our technical assistance.
Above all, we help analyze the “spillover” effects of one country’s policies on others. In the future, we believe this will be one of our most valuable contributions in this interconnected global economy.
The world is connected, but not united. In fact, the world is struggling to find new ways of working together on some of the issues that matter most: from climate change and international development to global financial stability.
China has a key role to play in shaping a stronger form of global cooperation, which I have called the “new multilateralism”. Later this year, for example, China will play a pivotal role in reaching an international agreement on climate change. And next year, China will have a chance to set the global economic agenda through its presidency of the G-20. What an exciting prospect! But also, what a great responsibility!
Let me conclude.
Over the past three decades, China has amazed the world through its economic transformations. Over the next few decades, China will astound the world through its global economic leadership.
As future leaders, you are the most important ingredients of this new China. As I said at the beginning, brewing an economic cup of tea requires a delicate mix of ingredients and impeccable timing. This is your time – your moment – to brew an outstanding cup of tea – for yourself, for China, for the world.
Thank you. Xièxiè.
1 Moreover, China is now home to 190 billionaires and more than two million millionaires. This means that, in terms of high-net-worth individuals, China ranks just below the United States.
Christine Lagarde is the managing director of the International Monetary Fund and this is a speech she gave at Fudan University, Shanghai on March 20, 2015.