The IMF fears a “spiral of global financial instability”

IMF Executive Director Christine Lagarde said Wednesday in Beijing that IMF feared the risk of a “spiral of global financial instability” if the world economies do not react together to tackle the crisis and stressed that Asia was not the shelter.

She also called on China to adopt a stronger currency, while the lower course of the yuan has been criticized by partners of China as the source of huge trade surpluses accumulated by Beijing.

“Unless we act together, the world economy runs the risk of a spiral of uncertainty and financial instability,” warned Ms. Lagarde in reference to debt crises and threats of recession during a speech at the start of a two-day visit to China.

“The world economy has entered a dangerous and uncertain phase,” said the director of the International Monetary Fund (IMF), stressing the interdependence of world economies. “We are all in this together and our destiny will rise or fall together.”

“The Brussels meeting was a step in the right direction,” she said about the EU summit in which decided in late October the last rescue plan for the euro area and Greece.

Christine Lagarde on her first visit to China as Executive Director of IMF. She will discuss with Chinese officials the consequences of the debt crisis in Europe and the conditions under which the second world economy might have to do more to help the old continent, including through a possible new instrument related to the IMF.

Wednesday in the Chinese capital, she met the governor of China’s central bank, Zhou Xiaochuan. After her stay in Beijing, director of the IMF needs to go to Japan.

China is the world first holder of foreign reserves, the colossal amount counts to 3,200 billion. Japan is second.

“China needs a stronger currency,” Lagarde also said while the main trade partners of China continue to claim that the yuan is undervalued, despite an increase of 7% of the Chinese currency against the dollar between June 2010 and August 2011.

Chinese economic officials promise to eventually increase the flexibility of the yuan and imports to balance their trade, but do not want to immediately take any risks for exporters of the country, which often operate with very narrow margins.

“China is on track to reorient its economy towards domestic demand,” the director of the IMF said Beijing is pursuing that objective, while China’s growth remains highly dependent on investment and exports, and relatively few of household consumption.

“China is a key player as the G20 and the IMF”, where the country has a “much bigger role and a greater voice to be heard,” said Lagarde.

She was referring to the reform of quotas and voting rights in the Fund for China to become the third country in terms of voting rights within the institution.

However, while acknowledging the economic health of China and its leadership to other developing countries, the IMF chief said that Asia was not “immune” against a “contagion” of the ills affecting Western nations .

“Asia is not immune. Whether through trade or financial sector that can act as an accelerator of crisis, Asia must be prepared,” warned Christine Lagarde.