IMF confirms yuan ‘no longer undervalued’ after appreciation
CHINA’S yuan is “no longer undervalued,” the International Monetary Fund said yesterday.
“Our assessment now is that the substantial real effective appreciation over the past year has brought the exchange rate to a level that is no longer undervalued,” the IMF said in a statement after a consultation mission to China.
The value of the yuan has been a source of tension for years with China’s major trade partners — led by the US — accusing the country of keeping it low to give Chinese exporters a competitive advantage, which China denied.
China keeps a grip on the value of the yuan out of concerns that unpredictable currency inflows and outflows could harm the economy and weaken its financial control.
Nonetheless it is still pushing for the currency to play a greater role in the world financial system, such as being included in the basket that makes up the IMF’s own “special drawing rights” reserve currency.
The US Treasury said in a semi-annual report last month to the Congress that the yuan remained “significantly undervalued,” although it stopped short of branding Beijing a currency manipulator, which would trigger sanctions from Washington.
Stable yuan
The yuan is one of the most stable currencies in world foreign exchange markets, with day-to-day volatility strictly limited by the authorities, and it spent almost two years around the 6.82 to the US dollar level until May 2010.
It later appreciated, reaching a high of 6.0406 in January 2014, according to figures from Bloomberg News, but has since fallen back, and with Chinese growth slowing, it dropped to 6.2747 earlier this year, its lowest level since October 2012. It has since risen by around 1 percent.
Nonetheless on a trade-weighted basis and adjusted for inflation, the Treasury report said the currency’s real effective exchange rate against the dollar was up over 10 percent over the previous six months.
China’s vast and regular trade surpluses have seen it accumulate the world’s largest foreign exchange reserves, which stood at US$3.73 trillion at the end of March.
“The still-too-strong external position highlights the need for other policy reforms — which are indeed part of the authorities’ agenda — to reduce excess savings and achieve sustained external balance,” the IMF said.
“We urge the authorities to make rapid progress toward greater exchange rate flexibility, a key requirement for a large economy like China’s that strives for market-based pricing and is integrating rapidly in global financial markets,” the IMF said.
Such steps included ensuring that in future “the exchange rate adjusts with changes in fundamentals,” it added.
China has set up yuan clearing arrangements with 10 countries and regions and signed currency swap agreements with 28 central banks.
The China-led Asian Infrastructure Investment Bank, which aims to support infrastructure development across the continent, is also expected to facilitate wider international use of the yuan.
The AIIB will be operational by the end of this year, prospective founding members said last week after a three-day meeting in Singapore to discuss policies.
China said in March that it hopes the yuan will “in the foreseeable future” become part of the IMF’s SDR assets, which are currently made up of the US dollar, the euro, the yen and the pound.
The IMF’s executive board reviews the basket composition every five years, with the next examination due this year.
Yuan inclusion is not a matter of “if” but “when,” it added.
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