After its recent gains, China’s yuan currency is no longer undervalued, but the government in Beijing should quicken reforms to move towards “a floating exchange rate”, the International Monetary Fund (IMF) said.
The IMF has previously labeled the yuan as “modestly undervalued”, despite the currency’s gradual appreciation since a landmark 2005 revaluation. The yuan has risen sharply against many currencies apart from the dollar in recent months, Reuters reported. “Our assessment now is that the substantial real effective appreciation over the past year has brought the exchange rate to a level that is no longer undervalued,” the IMF said.
In a reference to how China still has a large trade surplus despite a stronger yuan, the IMF said Beijing’s “still-too-strong external position” highlights the need for other reforms. Noting that China still faced risks from unsustainable credit and investment growth, the IMF urged the government to quicken reforms, especially among struggling state firms shielded from bankruptcy.
It also called for a more flexible yuan. “We believe that China should aim to achieve an effectively floating exchange rate within two to three years,” the IMF said in a statement after completing an annual consultation with Chinese officials.
China should step up fiscal support for its economy if growth dips below 6.5% this year, or prepare to take steps to rein in credit and investment if growth surprises on the upper side, the fund said. The IMF expected China’s annual economic growth to be 6.8% this year, before slowing further to 6.25% in 2016, it said in its report. “If incoming data suggest that growth is likely to exceed 7%, the authorities should take advantage of the opportunity to reduce vulnerabilities faster,” the IMF said. “If instead growth looks set to dip below 6.5%, then fiscal policy should be eased.”
It said that fiscal stimulus, if needed, should be on-budget and rely on measures that protect the vulnerable, support rebalancing, and are consistent with the reform agenda.
China’s economy grew 7.4% in 2014. It had annual growth of 7% in the first quarter and recent data showed growth had lost further momentum into the second quarter, increasing the risk that full-year growth may dip below the government’s targeted 7%.
The IMF has started its review of the Special Drawing Rights basket, a process which usually happens every five years. Including the yuan would promote the currency as a potential global reserve currency and could further increase its international usage.
China wants to internationalize the yuan, partly to provide an alternative to the dollar as a global currency and to reduce its own vulnerability to fluctuations in the greenback.
