The IMF has issued another warning that a “hard landing” for the Chinese economy is a major threat to the rest of the world. IMF Managing Director Christine Lagarde commented on Wednesday that there was a definite need for stronger policies relating to global financial stability. She also noted that recent policy changes in China, evolving global economic conditions and the looming increase in U.S. interest rates was likely to boost market volatility world-wide.

China's Currency Devaluation

Statements from IMF head Christine Lagarde

“Financial markets in a few short weeks have underlined the value that we attach to financial stability and the efforts that we must make to preserve such stability,” Lagarde said, speaking at an Asian finance conference in Jakarta, Indonesia.

“We are all feeling the impact of China’s rebalancing and moving to a revised business model. We are facing Japan’s continued slow growth, and falling commodity prices. On the top of it, we are all expecting the prospect of higher interest rates and the volatility that will inevitably result therefrom,” she continued.

Lagarde noted that Asia was not as significantly impacted during the 2008 global financial crisis and in 2013 when the U.S. Federal Reserve began to end its QE program, but now the situation is changing again today, with a notable increase in global financial volatility over the last couple of months.

Lagarde continued to say that solutions to financial instability typically apply similarly to most global economies. She said global central banks needed prudent fiscal policy, to minimize excessive credit growth, permit exchange rates “to act as shock absorbers,” maintain adequate foreign exchange reserves and boost regulatory oversight in the financial sector.

She also noted that global growth will probably come in somewhat less than the IMF projected in its most recent quarterly report, and said that growth in Asia was likely to slow further given the increase in global risk aversion and ongoing volatility in the financial markets.

IMF ready to help China

In her comments on Wednesday, the IMF chief told the media that the global banking institution “will try to help China” as it develops new economic policies.

“We are certainly talking to the Chinese authorities about their transition to a more market-determined economy, to an internationalization of their currency,”  Lagarde noted. “It’s a process that is clearly a transition, which has been hoped for, called for by many economic observers, analysts, partners, other countries around the world.”

She also commented that the China-led Asian Infrastructure Investment Bank could be a major boon in setting up financing for the trillions of dollars worth of infrastructure projects planned over the next decade or two. “This is an interesting initiative which I hope will be productive, which I hope will also be operated in conjunction and in good coordination with other players in the region.”

The AIIB is still in the formative stages, but over 50 nations have signed on so far. The new regional bank will join traditional lenders such as the World Bank and Asian Development Bank in making infrastructure-related loans.

“One more player with such a strong and broad support from many other investors is welcome,” Lagarde explained.