"We at the IMF support this strategy, in particular, the way fiscal policy has been used to support domestic demand in the face of a global slowdown, by putting the country's resources into a major effort to upgrade the national infrastructure, which enhances China's long-term growth potential as well as improving the lot of poorer regions," IMF Managing Director Korst Kohler said in a statement.

Kohler made the remarks on Friday at the end of a two-day visit to China, during which he exchanged views with Premier Zhu Rongji and other senior Chinese officials.

He commended China's approach to sequencing its opening-up to the outside world, by ushering in foreign direct investment first and being more prudent on debt inflows and short-term capital inflows. But he urged early consideration of other reforms, particularly greater exchange rate flexibility of China's currency, particularly given its current "position of strength."

On the back of unexpectedly robust growth in exports, strong inflow of foreign direct investment, and increased government spending, China's economy grew by an impressive 7.8 per cent during the first half of the year.

"Now what we observe is the internal structures and institutions getting stronger. This may now be the time to consider a next phase of opening up of the Chinese economy, which could include more flexibility with the exchange rate," Kohler told a group of Chinese reporters.

But he advised caution and urged the Chinese authorities not to rush, saying that the issue should "be studied further very carefully." He cited the need to build up an exchange rate market first and the strengthening of the central bank's supervision of foreign exchange transactions by banks.

"They should work further to prepare for this decision and the IMF has committed to stand ready for any discussions and lend support in defining the next steps," he said.

Describing China's accession to the World Trade Organization last year as a bold and courageous step that "will pay off handsomely in the future," Kohler stressed that "it is very important to prepare for the opening-up of an economy."

Such preparations, he said, should include strong national institutions, such as a good regulatory and supervisory framework for the banks, sound macroeconomic conditions, together with a culture of corporate responsibility and governance that protects against scandals and fraud.

Acknowledging uncertainties dogging a global economic recovery, Kohler said: "On the whole, the IMF sticks to its assessment that the major economic regions, that is the United States and Europe in particular, will continue their recovery."

Speaking of the anaemic Japanese economy, which he said was showing signs of bottoming out, Kohler welcomed Japanese Prime Minister Junichiro Koizumi's solutions to his nation's economic problems, but urged an accelerated implementation of "the right policies."

Kohler also underlined the lurking risk of the United States slipping into the quagmire of a "twin deficit," and urged the country to raise national savings and called for co-operation from Europe and Japan to prevent this from happening.

Two macro-economic conditions of concern to the IMF include "the immense currency account deficit of the US, which means that they have a permanent need of huge inflows of capital" and "a new deficit building up - a fiscal deficit," he said.

(China Daily September 16, 2002)