Tagged: IMF split

IMF split in China yuan exchange rate debate

Reuters | Thu Jul 29, 2010 | 2:36am IST

Yuan banknotes The IMF has softened its criticism of China’s currency regime in recognition of Beijing’s efforts to free up its exchange rate but the move showed a split among the Fund’s member countries. A summary of an annual review of China’s policies described the yuan as "undervalued," a change from "substantially undervalued," which was used by International Monetary Fund chief Dominique Strauss-Kahn as recently as June. The yuan has been a flashpoint in relations between China and old-line industrial powers, some of whom have complained that an undervalued yuan undercuts their exports. Without elaborating, an IMF board statement on Wednesday said several countries on the 24-member executive board believed the Chinese currency was undervalued. But others said a structural reduction in the balance of payments surplus was already unfolding thanks to steps taken to boost consumption, disagreeing with an assessment by IMF staff that the yuan was "substantially undervalued." "This does reflect a softening in the board’s position about the degree of adjustment that is needed in the Chinese exchange rate regime," said Eswar Prasad, a senior fellow at Washington’s Brookings Institution and a former IMF official.

IMF economists calculated the yuan was undervalued somewhere between 5 and 27 percent, depending on methodologies used, Prasad said. A diplomat in Beijing confirmed the range. Beijing dropped the yuan’s 23-month-old peg to the dollar and reverted to a managed float on June 19, since which time it has inched up 0.7 percent against the dollar. Prasad said it was premature for some countries to argue China had made a significant move on its currency regime and was boosting local demand to help rebalance the world economy. Despite the choice of language used by the IMF’s board, the Fund’s mission chief to China, Nigel Chalk, said Fund staff economists found the renminbi remained "substantially below the level that is consistent with medium-term fundamentals." That view was based on staff forecasts that China’s current account surplus, which has fallen to around 4 percent of gross domestic product, will rise to about 8 percent in five years as the world economy recovers and net exports pick up again. Beijing disagreed, arguing the surplus will stay at the new, lower level, Chalk told reporters on a conference call. Among the constraints in assessing China’s economy was the lack of a medium-term policy framework, he said.

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