IMF urges Beijing to move ahead with flexible exchange rates and economic reform

At its annual meeting with Beijing officials, the fund pushes the need for change to ward off economic and financial risks

PUBLISHED : Wednesday, 14 June, 2017, 3:28pm
UPDATED : Wednesday, 14 June, 2017, 11:22pm

The International Monetary Fund urged Beijing on Wednesday to resume progress towards a flexible exchange rate, in a subtle criticism of China’s recent interventions in support of the yuan currency.

The IMF also said China should speed up reforms to ward off financial risks, after two weeks of discussions with Chinese officials during its annual review of the health of the world’s second-largest economy.

David Lipton, first deputy managing director of the fund, said in a statement that China should gradually strengthen its monetary policy framework, allowing the yuan to move more freely and improving communications with markets.

“Capital flow measures should be applied transparently and consistently. Further capital account liberalisation should be carefully sequenced with the necessary supporting reforms, including an effective monetary policy framework, sound financial system, and exchange rate flexibility,” Lipton said.

The annual meeting came less than a month after China’s central bank changed its daily yuan reference rate formula, introducing a “counter-cyclical factor”, aimed, it said, at reducing volatility in the currency.

PBOC adjusts formula for yuan fixing, sparking rise in currency

Some analysts said the change reduced transparency over the yuan exchange rate, while others said it may have been aimed at countering downward pressure on the yuan should the US Federal Reserve raise interest rates, thereby increasing demand for the US dollar.

The yuan gained sharply against the US dollar in both the onshore and offshore markets in the weeks following the change.

Is the worst over for China’s economy and currency?

The IMF said that reform was essential for long-term financial health.

“While some near-term risks have receded, reform progress needs to accelerate to secure medium-term stability and address the risk that the current trajectory of the economy could eventually lead to a sharp adjustment,” the statement said.

“The critically important recent focus on tackling financial sector risks should continue, even if it entails some financial tensions and slower growth”.

The IMF forecast China to see GDP growth at 6.7 per cent this year and slow down to an average of 6.4 per cent from 2018 to 2020.