# Zhu Guangyao on global financial governance, divergent monetary policy and IMF reform

China's vice-minister of finance Zhu Guangyao speaks about the state of the global economy, deflation, and China's role in finance reform and the international monetary system

What is your assessment of the global economy?

Six years have passed since the bankruptcy of Lehman Brothers, yet the world has not fully stepped out of the shadow of the global financial crisis. For instance, the International Monetary Fund (IMF) downgraded its global economic forecast three times in 2014 (its latest expectation was for an annual global economic growth rate of 3.3%). The World Trade Organization (WTO) also lowered the expected global trade growth rate to 3.1%, compared with 5.2% in the past 20 years. This means that the growth rate is slowing, and that growth in trade is lower than expected. At present, the global economy is experiencing instability, uncertainty, imbalance and vulnerability.

Are the dynamics uneven, even polarised?

Last year, the imbalance of the global economy was demonstrated by the polarisation of emerging market countries. After the breakout of the crisis, the strong performance of the emerging market economies facilitated global economic growth. But in 2014, the growth rates of Russia and Brazil - both members of the Brics nations (with the group also comprising India, China and South Africa) - were only 0.2% and 0.3% respectively. Compared with these two countries, China and the US still enjoyed strong economic growth. The IMF maintained its optimistic prediction of China's 7.4% economic growth rate in 2014, and has not adjusted its prediction for the country's 2015 figure (7.1%). Meanwhile, the fund adjusted the economic growth rate of the US from 1.7% to 2.2% in 2014. China and the US will clearly be major contributors to growth in the global economy.

On the other hand, Europe still faces challenges. The IMF said economic growth in the eurozone is 0.8%. Meanwhile, the unemployment rate in Europe remains relatively high. Europe's two major economies, Germany and France, were expected to grow at a rate of 1.4% and 0.4% respectively. The market's concerns are obvious. Among the Asian economies, the IMF expected Japan's economic growth to be 0.9% in 2014. But after the adjustment for the introduction of a rise in domestic consumption tax, a 7% decrease occurred during the second quarter of 2014. By the end of October, the governor of the Bank of Japan lowered the central bank's economic growth prediction to 0.5% - 40 basis points lower than the IMF's prediction. This is not good news for either Japan's economy or for global economic growth. Structural adjustment - the ‘third arrow' of prime minister Shinzo Abe's administration - seems to be facing great challenges.

Are you concerned about deflation and divergent monetary policies?

The risk of deflation is currently driving the co-ordination of monetary policy among G20 countries. The solution to global deflation lies in financial policy. Today, world interest rates are at their lowest levels compared with any other period of business cycle recovery since the Second Word War. On the one hand, it reflects that the process of recovery is relatively slow. On the other, it implies there is a risk of deflation. Deflation has long been apparent in Japan, but recently the annual rate of inflation rate in the Europe was as low as 0.3-0.4%. The president of the European Central Bank (ECB), Mario Draghi, admitted in August that Europe was facing the risk of deflation, and said the ECB would not raise its interest rate before the middle of 2017. Therefore, the risk of deflation to the European economy will be great.