Thursday, October 9, 2008

China's currency 'substantially undervalued': IMF

China's currency remains "substantially undervalued", the International Monetary Fund said Wednesday, arguing that greater exchange rate flexibility would benefit the Asian giant.

In its half-yearly World Economic Outlook report, the IMF said a more flexible yuan, or renminbi, would help China shift growth momentum towards domestic sources and make its monetary policy more effective.

"In the IMF staff's view, the renminbi remains substantially undervalued relative to medium-term fundamentals," the report said.

The IMF further predicted 9.7 percent economic growth for China in 2008 and 9.3 percent in 2009, down significantly from 11.9 percent in 2007, saying this was "partly because of slowing exports".

Even so, it argued China's heavily export-dependent economy would be better off if it allowed its currency to rise further.

"Progress needs to continue toward appreciation of the renminbi as part of China's broader strategy to shift the sources of growth toward internal demand and to increase the effectiveness of monetary policy," it said.

Chinese policy-makers have said repeatedly they aim for domestic factors, especially consumer spending, to play a bigger role in creating growth.

The IMF also argued in its report that the Chinese government would have greater freedom to carry out monetary policies with a more flexible yuan.

"The authorities have used administrative and prudential measures in an effort to limit credit growth, but allowing greater exchange rate flexibility would increase the room for a more independent monetary policy," it said.

The IMF also argued that a strengthened Chinese currency could aid efforts to address global imbalances such as a large US current account deficit.

In its previous World Economic Outlook report, issued in April, the IMF also called for a stronger yuan.

But in the six months that have passed since then, China's nominal exchange rate has not moved much.

Chinese economists have argued that Beijing cannot afford to let its currency rise too quickly while Chinese exporters -- major employers and therefore politically crucial -- are faced with unprecedented challenges.

Not only are the exporters up against weakening demand from major markets such as the United States, but they also have to cope with rising prices, especially of energy.

China has in the past tended to shrug off IMF calls to loosen restrictions on its exchange rate.

Last year, Vice Finance Minister Li Yong said the Fund should not put too much emphasis on the exact exchange rates of the currencies of member nations.

China moved its currency away from a peg to the US dollar in July 2005, and has since allowed it to strengthen by more than 15 percent against the greenback.