IMF takes a softer line on yuan

The International Monetary Fund called China's currency 'moderately undervalued' and expressed confidence the mainland economy will grow by 8 per cent this year - faster than the government's target.

The remarks are contained in the Washington-based lender's annual report card of the mainland's economic and financial policies, which was issued yesterday. The comment on the yuan is in sharp contrast to last year's report, which said the currency was 'significantly undervalued' by an estimated 3 per cent to 23 per cent against a basket of currencies, depending on the methodology used. The latest assessment echoes statements made by a senior IMF official in Beijing in early June indicating the fund was taking a softer line.

Markus Rodlauer, head of the IMF China team, explained the new position by saying that 'numbers tend to get a life of their own'. He said estimates of the extent of the undervaluation would appear in a separate exchange-rate report to be issued soon.

On Saturday, Yi Gang, vice-governor of the People's Bank of China, the central bank, said the yuan was 'very close' to equilibrium levels and the current status would be maintained in the 'foreseeable future'.

According to the Bank of International Settlements, the yuan's real effective exchange rate (EER) appreciated 0.85 per cent against a basket of currencies of China's major trade partners in the first half. The real EER is the weighted average of a currency relative to an index or basket of other currencies, adjusted for inflation. The weights are determined by comparing relative trade balances.

The IMF's softened wording comes at a time when it expects the mainland to have 'a fairly significant impact' on other countries' growth if a sharp slowdown takes place in the world's second-largest economy.

Concerns over the yuan's level are fading and should not be the top priority of a new US administration, Thomas Donohue, president of the US Chamber of Commerce, said last week while issuing a report advising mainland firms to invest in the US.

The IMF forecasts a currentaccount surplus of 2.3 per cent of China's gross domestic product this year, rising over the next five years to 4.3 per cent in 2017. That longer-term prediction was 'well below the 7 to 8 per cent of GDP previously expected', the IMF report said.

The fund welcomed the decline in China's external imbalance, but was concerned about the rising domestic imbalance, reflected in a further rise in China's already elevated level of investment, according to the report.

Rodlauer said China needed a smooth handover from investment to domestic consumption as its main driver of growth as the strong investment cannot continue at a rapid pace forever. 'We believe that growth at around 7 to 8 per cent a year is sustainable for China and is very doable,' he said. The official target for this year is a 7.5 per cent expansion.