The global economy has stepped back from the brink of danger and signs of stabilisation are emerging from the euro zone and the United States, but high debt levels in developed markets and rising oil prices are key risks ahead, the International Monetary Fund (IMF) said yesterday.

'The global economy may be on a path to recovery, but there is not a great deal of room for manoeuvre and no room for policy mistakes,' IMF managing director Christine Lagarde said in a speech in Beijing.

In a separate talk on the same day, she said China's yuan could become a reserve currency in the future, adding that the country needed a road map for a stronger, more flexible exchange rate system.

Signs of stabilisation were emerging to show that policy actions taken in the wake of the global financial crisis were paying off, she said. She added that US economic indicators were looking a little more upbeat and that Europe had taken an important step forward in solving its crisis, with the latest efforts on Greece.

The IMF chief cited still fragile financial systems burdened by high public and private debt that persists in advanced economies as the first of three major risks.

'Second, the rising price of oil is becoming a threat to global growth. And, third, there is a growing risk that activity in emerging economies will slow over the medium term,' she said.

Ms Lagarde also said youth unemployment should be tackled.

She said advanced economies must continue with macroeconomic support and a balanced fiscal policy, together with financial sector reforms and structural and institutional reforms to repair the damage done by the crisis and to improve competitiveness.

Meanwhile, emerging market economies need to calibrate macroeconomic policies, both to guard against fallout from the advanced economies as well as to keep overheating pressures in check.

Ms Lagarde's comments on the yuan as a reserve currency were the most direct endorsement to date by an IMF official of China's ambitions for its currency.

'What is needed is a road map with a stronger and more flexible exchange rate, more effective liquidity and monetary management, with higher quality supervision and regulation, with a more well-developed financial market, with flexible deposit and lending rates, and finally with the opening up of the capital account,' she told a gathering of leading Chinese policymakers and global business leaders.

'If all that happens, there is no reason why the yuan will not reach the status of a reserve currency occupying a position on a par with China's economic status.'

China operates a closed capital account system and its yuan currency is tightly controlled, although Beijing has said it wants to increase the international use of the yuan to settle cross-border trade and has undertaken a series of reforms in recent years to that end.

Ms Lagarde said she saw three priorities for China: first, to support growth; second, to shift its drivers of economic growth away from investment and exports towards domestic consumption; and third, to spread wealth more widely.

At the same gathering yesterday, Vice-Premier Li Keqiang said that China cannot delay tough economic reforms, underscoring the top leadership's push for market-based change.

Mr Li, widely expected to succeed Mr Wen Jiabao as premier in a leadership transition that begins later this year, promised flexible policies to keep growth brisk and prices stable, with a focus on boosting domestic demand and pursuing structural reforms to make growth more stable and balanced.

asiaone