IMF chief warns world economy risks 'downward spiral'

AFP - International Monetary Fund chief Christine Lagarde delivers her speech at the International Finance Forum in Beijing on November 9, 2011.

Lagarde said Asia was not immune to problems currently sweeping the eurozone, as she began a two-day visit to China likely to focus on the deepening debt crisis in Europe.

"If we do not act together, the economy around the world runs the risk of a downward spiral of uncertainty, financial instability," she said at the International Finance Forum in Beijing.

Lagarde has so far held talks with Chinese central bank governor Zhou Xiaochuan on the "global economic situation", the People's Bank of China said in a brief statement. It is unclear who else she will meet in Beijing.

Any discussions are expected to touch on China's possible contribution to a bailout fund -- the European Financial Stability Facility -- established to provide support to the bloc's struggling economies.

European leaders have called on China, which has the world's largest foreign exchange reserves at $3.2 trillion, to invest in the fund.

The head of the fund, Klaus Regling, has travelled to Beijing for talks about a possible contribution, but China has so far made no firm commitment to provide financial assistance for the troubled eurozone.

Europe has been discussing with China and other investors how to structure a special purpose investment vehicle and is exploring the possibility of linking it to the IMF.

"We are all in it together and our fortune will rise or fall together," said Lagarde, fresh from a visit to Russia where she warned Moscow against complacency given the budget crises in eurozone states.

"Asia is not immune. Whether it is the trade channel or whether it is the financial sector which can operate as a crisis accelerator, Asia needs to be prepared."

Lagarde added to pressure on Beijing for a faster appreciation in the yuan, saying that while China was on the "right path" in terms of boosting domestic demand, a stronger Chinese currency "in real effective terms" was needed.

The United States and Europe -- major buyers of Chinese products -- have accused Beijing of deliberately keeping its currency undervalued to give its exporters an unfair advantage. Beijing has rejected the charges.

At the G20 summit last week, China pledged to promote greater flexibility in the currency, but analysts do not expect to see a dramatic change in the value of the yuan given the importance of exports to the Chinese economy.