A former Beijing banker now at the International Monetary Fund sheds light on China's global wants and needs One way to raise the status of emerging market nations in the International Monetary Fund is to attract high-level talent to the organization's headquarters from Asia's growth leaders. IMF recruiters hit the jackpot when they signed up Zhu Xin, who worked at Bank of China from 1996 to 2005 as economic advisor to the president and deputy president. He was named special advisor to IMF Managing Director Dominique Strauss-Kahn last May. (Zhu Min) An overseas education, fluent English and years of experience in macroeconomic policymaking garnered Zhu a warm welcome at IMF headquarters in Washington. Since then, American colleagues have expressed admiration for Zhu, telling Caixin that he reflects the best in modern, Chinese-style decision making. Zhu is now in the thick of discussions over China's challenges and changing circumstances in the face of an economic recovery in developed countries. He took time to describe the decision-making landscape to Caixin on January 28 in the Swiss town of Davos, where he participated in the World Economic Forum. He said "the most worrisome" outcome for China as it adjusts to the global economy in coming years "would be a return to export-led economic growth, which would make efforts at structural adjustment come to naught." In the interview, Zhu also discussed the progress toward including the yuan in the IMF Special Drawing Rights (SDR) currency basket and the currency's internationalization. "The important thing is the establishment of a yuan market," he said. Here are more excerpts from the Zhu interview: Caixin: With the recovery of developed nations basically back on track, and if their monetary policy remains loose, what risks must emerging economy countries guard against? Will there be another food crisis? Zhu: Looking at things now, food prices overall are volatile, especially soybeans and wheat. There are also some problems with cocoa now. It's mainly that stocks are insufficient and the weather has not been good. There have been fires in Russia, floods in Australia, and recently Latin America has been experiencing extreme weathers due to climate change. This has made for supply-side fluctuations. Everyone is still bullish on global food and agricultural product prices. At the same time, with the center of economic development shifting from developed countries to developing countries, there is indeed upward pressure on commodity products on the demand side. Caixin: This year in emerging markets, especially in China, how much pressure is there for inflation? How do we begin to deal with it? Zhu: For emerging markets, a very important point is inflation management, bringing food price increases under control, and not letting this spread to create broader inflation. Because food accounts for 34 percent of theCPIin China, and even more in India at 47 percent, food price volatility has a big impact on CPI. At the same time, there are also supply-side price increases in emerging economies, such as labor costs, resource prices, water prices, land prices and pollution control costs. So if food price increases spread to supply-side costs, (inflation) will be difficult to control. Thus, gaining control in the first stage is a priority. It's most important. China's biggest risk is inflation, and the main thing is to balance inflation and growth. This will be needed not only in 2011. In overall economic development, China is climbing a ladder toward per capita income of US$ 5,000. In the next five to 10 years, China will follow a path of gradually rising prices. Inflation is a very important issue that China needs to face and deal with in the medium- and long-term. Caixin: Besides inflation, what challenges will new global growth prospects bring? Zhu: With U.S. demand recovering, if emerging market economies go back down the road of the export-driven (growth) model, I think it would be quite unfortunate. Because in the last two years, we've spent a lot of energy on changing the mode of growth, such as the export surplus, which has fallen from 7.8 percent in 2007 to 4.2 percent this year. This shows that the strategy is working. But as U.S. demand increases, changes may also occur. I think this is a new change. We can't turn to exports and go back, because the export situation is improving. The temptation is certainly great, because it's difficult not to (export) if there is demand. But the transformation of the Chinese growth model still requires adherence to the long-term development strategy, with domestic consumption as a major driving force for economic growth. Yuan Market Caixin: At a Davos discussion, you said including the yuan among SDRs is inevitable. What everyone wants to know is whether this means an acceleration of the liberalization of the capital account and the convertibility of the yuan. How can such goals be achieved? Zhu: There are numerous discussions on SDRs and adding the yuan to SDRs. The most recent big development was that the French president publicly supported adding the yuan to the SDR basket. When Chinese President Hu Jintao was in the United States, a very important point in a joint statement was that the United States supported adding the yuan to SDRs. This is the first time the international community affirmed the internationalization of the yuan. This is a matter of particular importance. But at the same time, we also need to recognize that the internationalization of the yuan is a long process. It involves many steps. For example, we've now opened 30 items in capital accounts out of a total 43. The remaining items still need to be liberalized. For the yuan to be convertible, what's important is establishing a market. In the final analysis, the internationalization of a currency depends on financial assets denominated in that currency. What's important is that there is market demand for this financial product. So this is establishing a market, establishing a system, which is a very long process. At the same time, because the yuan is still a non-convertible currency, putting the yuan into the SDR basket requires a long, technical discussion. What's good is that there is a political and international affirmation of the yuan's international position. There rest needs specific, technical discussion. Caixin: We're now seeing a lot of yuan internationalization initiatives, such as neighboring countries being able to exchange it and currency swaps, as well as Chongqing's yuan settlement pilot program. Will this speed up the internationalization of the yuan? Zhu: Right. But I split the matter into two parts. One is the internationalization of the yuan and the other is its use outside (China), such as for trade settlement. There is now direct investment in yuan, yuan accounts and settlements. This gives the yuan the ability to be used internationally while still being non-convertible, but also shows the yuan's strength and status. But this still doesn't signify the internationalization of the yuan. The full internationalization of a currency occurs when it is in general use worldwide. So, the first step is to use a medium of circulation and exchange. Second, and more important, is having yuan-denominated financial products. The final step is to build systems, infrastructure and a market.