New | China's yuan no longer undervalued, says IMF
Agency declares currency level 'fair' for first time in decade as it urges faster reforms and a more flexible exchange rate
China's yuan is no longer undervalued after "significant" appreciation over the past 12 months, the International Monetary Fund said yesterday in the agency's first such finding in more than a decade.
Even so, the IMF called on Beijing to make the exchange rate more flexible while quickening reforms in the state sector.
The agency also forecast that China's growth might dip to about 6.8 per cent this year.
The IMF announced its assessment yesterday after wrapping up the 2015 Article IV Consultation Mission to China.
China should aim to achieve an effectively floating exchange rate within two to three years
IMF first deputy managing director David Lipton joined the final policy discussions and met Vice-Premier Ma Kai , People's Bank of China Governor Zhou Xiaochuan and other regulators.
China has expressed a strong wish for the IMF to include the yuan in the Special Drawing Rights basket in its October review. The SDR now comprises four currencies: the US dollar, the yen, the euro and the sterling.
The IMF has said it is just a matter of time before the yuan is included in the basket, but has insisted the currency must first be freely convertible.
Beijing has actively pushed forward the currency's internationalisation. HSBC estimated the share of yuan trade settlement might account for half of China's total trade by 2020, from just a little more than one-fifth last year.
But the IMF said China's external position remains high, while Beijing needs to further reduce excess savings and achieve sustained external balance.
"This will also require that, going forward, the exchange rate adjusts with changes in fundamentals and, for example, appreciates in line with faster productivity growth in China," the agency said.
"We believe that China should aim to achieve an effectively floating exchange rate within two to three years."
The IMF projected China's gross domestic product to grow 6.8 per cent this year, below Beijing's 7 per cent official target.
In the first quarter, GDP growth cooled to just 7 per cent year on year - a six-year low - because of sluggish domestic investment growth and lacklustre external demand.
"I do think there's a balance that has to be struck between promoting higher quality growth and maintaining stability in the economy", such as to calibrate local government spending and finance to "ensure neither rises too quickly", Lipton said.
"Since the global financial crisis, growth has relied on an unsustainable mix of credit and investment that has resulted in rising vulnerabilities."
Beijing should work on reducing such vulnerabilities faster when economic growth looked likely to exceed 7 per cent. However, if China's growth looked set to dip below 6.5 per cent, then fiscal policy should be eased, the IMF said.
