IMF welcomes China's progress on currency

The International Monetary Fund Wednesday welcomed China's progress on liberalizing its currency, but said some countries still view the yuan or renminbi as "substantially undervalued."

The IMF executive board "welcomed the important progress made in the past few years in increasing the market's role in determining the exchange rate, as well as the consequent substantial real appreciation that has been achieved since the exchange rate reform in 2005," the multilateral institution said.

"Some directors nevertheless supported the view that the renminbi remains substantially undervalued," it said in its first review of China's economy since 2006.

The 24-member exeuctive board, chaired by IMF managing director Dominique Strauss-Kahn, includes directors representing the US, China, Japan, Germany, France, Britain, Russia and Saudi Arabia. The remaining 16 directors represent groups of countries in the 186-member IMF.

The statement on the conclusion of the so-called Article IV bilateral consultation with China on July 8 signaled an improvement in relations between the Washington-based IMF and Beijing.

The Chinese authorities had disagreed sharply with the IMF's October 2006 report, which found China's renminbi, or yuan, currency was out of line with the country's economic fundamentals.

The United States, the largest IMF stakeholder, and European countries have pressed China to allow the yuan to appreciate, accusing Beijing of keeping it artifically low to protect its crucial export sector.

Cheaper Chinese products have flooded into the US, building a gargantuan dollar trade surplus. The politically sensitive US trade gap with China, the country's second-largest trading partner and responsible for more than half of the deficit, widened to 17.484 billion dollars in May.

The latest IMF board assessment on China's economy comes ahead of the first US-China high-level strategic and economic talks next week under US President Barack Obama's administration.

Obama is scheduled to speak Monday at the opening of the two-day US-China Strategic and Economic Dialogue meeting in Washington.

The discussions are an extension and expansion of an economic dialogue begun under the previous administration of George W. Bush.

The IMF executive board said that since the middle of 2008, the yuan's nominal exchange rate appreciation against the US dollar "has stopped although the nominal effective exchange rate has appreciated 5.0 percent," with real appreciation in the 12 months to May at 5.0 percent.

However, IMF directors were divided over the role of the currency in China's rebalancing of its economy to reduce its dependence on exports.

"Looking ahead, many directors considered that a further strengthening of the renminbi would be part of a comprehensive strategy to rebalance the economy by increasing the purchasing power of households and the labor share of income, and reorienting investment toward non-tradable sectors," the statement said.

"A number of other directors pointed to the methodological difficulties of making exchange rate assessments. These directors generally considered that exchange rate appreciation would only play a supplementary role in supporting reforms to reorient the Chinese economy and should be pursued in a gradual manner, as and when conditions permit."