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PBOC's Zhou: Sovereign Debt Risk Major Threat To Global Financial Stability

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Saturday, April 24, 2010
PBOC's Zhou: Sovereign Debt Risk Major Threat To Global Financial Stability

Dow Jones Newswires

WASHINGTON -(Dow Jones)- China's central bank chief Zhou Xiaochuan warned Saturday that sovereign debt risk has become a "major and real threat" to the stability of the global financial system and economic recovery.

Speaking at the International Monetary Fund's Spring meeting, Zhou said the primary risks to the global economy come from developed countries.

Zhou didn't mention the Chinese yuan in the speech, a hot topic in the financial markets amid rising speculation of a near-term appreciation of the currency against the dollar.

Instead, Zhou said the outlook for the global economy faces many uncertainties, calling for developed countries with "flagging economic recoveries" to put their fiscal houses in order and accelerate reform in both their financial sectors and structural issues in their economies, he said.

They need to "restore fiscal discipline as quickly as possible by formulating and implementing a comprehensive, credible, and transparent fiscal consolidation strategy and adopting measures to contain sovereign risk and avoid cross-border contagion," said Zhou.

Greece's debt and fiscal woes have highlighted sovereign debt risks in developed countries as the euro-zone member country decided earlier this week to formally request a EUR45 billion funding package from the European Union and the IMF.

The IMF has warned that sovereign credit problems pose a major challenge to the world economy still recovering from the worst downturn in several decades.

Turning to the Chinese economy, Zhou said it is expected to continue a "stable and relatively rapid growth" this year, reiterating the government's forecast of about 8% growth.

The gross domestic product expanded at 11.9% in the first quarter from a year earlier, outpacing all the major developed nations. The IMF earlier this week revised up its forecast for China, expecting its economy to expand 9.9% for next year.

Zhou said the Chinese economy faces "complex" challenges and "deep-seated problems" have yet to be fundamentally resolved.

To sustain the economic growth, Zhou said China will continue to implement a proactive fiscal policy and a relatively easy monetary policy.

Still, Zhou signaled Chinese policy makers' commitment to making adjustments for its growth model by "aggressively" expanding domestic consumption demand.

U.S. and many other countries have urged China to cut reliance on exports and nurture domestic consumption as a way to address the global trade imbalances and to strive for a more balancing global growth in the long term.

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