The summary of an annual review of China’s policies omitted the contentious word, used by IMF Managing Director Dominique Strauss-Kahn as recently as June, which has long riled Beijing. Several members of the IMF’s 24-member executive board believed the Chinese currency was too cheap, the fund said. But others said a structural reduction in the balance of payments surplus was already unfolding thanks to past steps to boost consumption, while others took issue with an assessment by IMF staffers 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 the Washington-based Brookings Institution and a former IMF official. He said this was reflected in statements to the IMF board, which met on Monday, that China had already made a big move towards greater currency flexibility and progress in rebalancing demand. Beijing dropped the yuan’s 23-month-old peg to the dollar and reverted to a managed float on June 19.
China’s trade surplus has also shrunk considerably as government efforts to pump up the economy have sucked in imports of commodities and capital goods. “On both counts this conciliatory tone is a little premature, because despite the announcement there hasn’t been that much movement of the Chinese currency,” Prasad said. The yuan has risen 0.7 percent against the dollar since it was unshackled from the US currency. Prasad said IMF economists reckoned the yuan was still between 5 percent and 27 percent undervalued depending on the methodologies used.
“Several Directors agreed that the exchange rate is undervalued. 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,” the IMF said. Prasad said IMF economists are projecting a big rebound in the current account surplus, which has fallen to around 4 percent of gross domestic product, whereas China is contending that it will stay at the new, lower level.
China was so angry with the Fund’s exchange rate views that it withheld cooperation on the annual review from 2007 to 2009. Beijing, though, has gradually been gaining clout in the IMF. Last year it bought $50 billion worth of notes to beef up the fund’s capital and a deputy governor of China’s central bank, Zhu Min, has started work as a special assistant to Strauss-Kahn.
