IMF scraps 'substantially' undervalued from yuan assessment

THE International Monetary Fund says the yuan is not "substantially" undervalued, a move that recognises China's efforts to free up its exchange rate and avoids ruffling feathers in Beijing.

The summary of an annual review of China's policies omitted the word, used by IMF managing director Dominique Strauss-Kahn as recently as June, reports Reuters.

It claimed that 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," Eswar Prasad, a senior fellow at the Washington-based Brookings Institution and a former IMF official, was quoted as saying.

Mr Prasad said this was reflected in statements to the IMF board 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.

"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. Any notion that they have in fact successfully started rebalancing their economy is also quite premature," Mr Prasad added.

The yuan has risen 0.7 per cent against the dollar since its peg was removed from the US currency.

Mr Prasad said IMF economists regarded the yuan as being between five and 27 per cent 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.

According to Mr Prasad, IMF economists are forecasting a big rebound in the current account surplus, which has fallen to around four per cent of gross domestic product, whereas China is contending that it will stay at the new, lower level.
(Source:www.schednet.com)