By Xiao Xun
Economists critical of the IMF’s assessment said it did not reflect the real value of the Chinese yuan, and that the IMF was being pressured by Beijing to help clear the way for the yuan to be added to the Special Drawing Rights basket.
The IMF said in a statement in Beijing on Tuesday that “our assessment now is that the real effective appreciation over the past year has brought the exchange rate to a level that is no longer undervalued.”
An IMF mission is visiting China this week, including its first deputy managing director, David Lipton. Speaking at the conclusion of an annual review of the Chinese economy, Lipton said the yuan had appreciated against most other currencies in recent months, helping China to reduce its “very large” current account surplus and slow its accumulation of foreign reserves. He said all these indicated that the yuan was no longer undervalued.
According to statistics cited by Bloomberg, the yuan rose against all 31 major currencies over the past 12 months, while the Russian ruble and Brazilian real depreciated the most.
Toward a Floating Rate
While dropping its long-held view that the yuan was undervalued, the IMF continued to urge China to “make rapid progress toward greater exchange rate flexibility.”
Lipton said China should strive to realize a floating exchange rate within two to three years, because such a move would be helpful for the government to weather continued upward pressure on the yuan as productivity increases.
Yuan appreciation against the currencies of China’s major trading partners, especially the U.S., has been a subject of hot debate for years. The U.S. accuses China of keeping the yuan low to encourage exports, an accusation China denies.
The U.S. Treasury Department suggested in its semiannual report to Congress last month that the yuan was still “significantly undervalued.” Treasury Secretary Jacob Lew reiterated last week that China should make more progress on exchange rate reforms.
Economists in Washington reacted differently to the IMF assessment of the yuan. William Cline, an economist at the Peterson Institute for International Economics, gave the same conclusion recently in his independent research. His colleague, Gary Hufbauer, senior fellow at the Peterson Institute, agreed. “I think we can conclude right now the Chinese yuan is appropriately valued,” he said. “I know it’s a big issue in recent years, but right now it’s not been an issue.”
IMF Assessment “Out of Date”
Robert Scott, director of trade and manufacturing policy research at the Economic Policy Institute, disagreed. He called the IMF’s assessment “out of date and mistaken.”
“The fact is that China is still intervening heavily in the foreign currency market,” he said. “It simply stopped engaging in traditional purchases of foreign exchange reserves held by the Central Bank.” What China has done instead, he said, “is switch over to a great increase of its holdings of sovereign wealth funds — government-controlled investment in private stocks, bonds, commodities, lands and real estate abroad.”
Scott said China’s holding in early 2015 in the sovereign wealth fund reached nearly $1.5 trillion. “There’s a very strong correlation between foreign investment and accumulation of the large, growing current account surpluses,” he said. “So China is intervening, and China has large and growing current account surpluses.”
Although Beijing reduced its financial control and is concerned about the subsequent economic damage of having greater flexibility in the yuan’s foreign exchange rates, it is very active in seeking the yuan’s greater influence in the international financial system, including adding the yuan to the SDR basket.
The IMF’s Lipton said in Beijing that the fund welcomed “Chinese efforts in this regard.” Markus Rodlauer, IMF’s deputy director of the Asia and Pacific Department, said the IMF would work closely with China to include the yuan in the SDR basket. He added that it was not a matter of “if” but “when.”
Every five years, the IMF reviews the SDR basket, which currently includes the U.S. dollar, the euro, the Japanese yen and the British pound. The IMF will review the basket composition later this year.