Yuan 'substantially' undervalued: IMF
The Chinese currency is "substantially" undervalued, a senior IMF official said today, more than a month after Beijing said it would allow the yuan to trade more freely.Updated: Jul 28, 2010 23:07 IST
The Chinese currency is "substantially" undervalued, a senior IMF official said on Wednesday, more than a month after Beijing said it would allow the yuan to trade more freely.
"I think the staff view on the currency is that the renminbi (yuan) remains substantially below the level that is consistent with medium-term fundamentals," said Nigel Chalk, who recently led an International Monetary Fund mission to China for annual consultations on Beijing's policies.
The mission chief made the comment amid a split within the IMF over the current value of the Chinese currency, apparent in a report issued late Tuesday by the Washington-based fund's executive board after the consultations.
The differences in view appeared between the board and the staff, who went on the mission, as well as within the board.
"Several directors agreed that the exchange rate is undervalued," the report said, without citing the countries they represented.
"However, a number of others disagreed with the staff's assessment of the level of the exchange rate, noting that it is based on uncertain forecasts of the current account surplus," it said.
The directors from United States, Germany, France and Britain were believed to be among those who felt the yuan was undervalued, following persistent charges China kept the yuan low to gain a trade advantage.
The report also said that "many directors stressed that, over time, a stronger renminbi (yuan) would help facilitate a shift from exports and investment to private consumption as the principal driver of economic growth."
The IMF staff views on the consultations with Beijing were not published together with that of the fund's executive board, contrary to its practice in reporting on most economies.
China has been blocking the publication of the staff analysis, which is allowed under IMF rules, since 2007 reportedly due to criticism over its currency practice.
"Our expectation is that, that (staff views) will be published but the decision on whether to publish is the decision of the Chinese authorities and they have not yet made the decision," Chalk said.
He said the report released Tuesday contained "summary views of the executive board after they reviewed the staff report and heard from the Chinese authorities."
Many analysts believe the yuan remains vastly undervalued against the dollar -- some think it below its true value by as much as 40 percent -- despite the June 19 announcement by the Chinese central bank to let the yuan trade more freely.
Since the decision, the yuan, which had been effectively pegged at 6.8 to the dollar since mid-2008, has appreciated by less than one percent.
Chalk defended the staff view that the yuan was undervalued, saying it was "based on a broad range of factors," including the exchange rate, productivity, foreign currency intervention, reserves and the current account.
He particularly referred to China's current account balance, the broadest measure of trade with the world, and seemingly the point of contention among IMF officials on the yuan rate.
"I think our outlook of the current account balance is pretty clear," Chalk said.
He pointed out that China's current account surplus was projected to rise again after dropping in 2009 for the first time in eight years -- by 35 percent year-on-year to 284.1 billion dollars -- as the global crisis hit exports.
Beijing this month revised upwards the current account surplus for the first quarter of 2010, after discovering that a year-on-year fall was smaller than previously announced.
"Our forecast is that current account will come back, we have a medium-term forecast for the current account heading towards around eight percent of GDP over the next five years," Chalk explained
"We feel that is not consistent with a rebalanced economy... We think the current account needs to be smaller."
First Published: Jul 28, 2010 23:05 IST