China’s efforts to rebalance toward more sustainable growth is positive for the global economy, IMF Managing Director Christine Lagarde said in a speech.

 

Likening efforts to rebalance growth to brewing “an exquisite cup of Chinese tea,” Lagarde said it will be essential to continue reforms such as liberalizing deposit rates and removing implicit guarantees for state-owned enterprises. The biggest challenge: avoiding the middle-income trap.

 

“Slower, safer, and more sustainable growth is good for China and its people –- and it is good for the world,” Lagarde said in the text of a speech to be delivered at Fudan University in Shanghai. “By brewing its economic cup of tea more slowly, China will end up with a richer taste.”

 

Premier Li Keqiang this month set a gross domestic product goal for 2015 of about 7 percent -- down from last year’s aspiration of about 7.5 percent. To cushion the slowdown, the central bank has cut interest rates twice since November.

 

The International Monetary Fund has forecast GDP growth of 6.8 percent for China this year.

 

On the global economy, Lagarde said the outlook remains fragile and warned that any policy tightening by the Federal Reserve even as central banks around the world, including the European Central Bank, continue to ease, will heighten the risk of negative spillover effects for emerging markets.

 

Fed Risks

 

“If not well managed, this ‘asynchronous’ monetary policy may trigger excessive volatility in global financial markets,” Lagarde said. “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.”

 

The IMF plans changes to its ownership structure, which would give emerging markets more influence and install China as the third-largest member nation. The changes have been held up by the refusal of the U.S. Congress to ratify them, even though the White House and governments around the world support them.

 

“China has a key role to play in shaping a stronger form of global cooperation, which I have called the ‘new multilateralism,’” Lagarde said.