* IMF softens language on yuan, says “moderately
* Sees risks if investment slows, bad loans rise
* Says Beijing has ability to handle economic shocks
* Cites fiscal spending as main line of defence
By Lucy Hornby
BEIJING, July 25 (Reuters) – China’s economy is set for a
soft landing even as global headwinds increase, the
International Monetary Fund said in a report on Wednesday that
urged further reform and currency appreciation to rebalance
growth and reduce risks.
The report said economic reforms so far had substantially
reduced external imbalances, but at the cost of significant
domestic imbalances fueled by its investment-driven growth
In a key change, the IMF said China’s yuan was now only
“moderately undervalued”, a softening of previous language, in
an annual review warning of risks to growth if investment were
to slow sharply or if there was a sudden rise in non-performing
loans. But it stressed Beijing’s ability to handle potential
“Policies should continue to be geared toward achieving this
year’s growth targets. In the event of a worsening of the
external outlook, China has ample room to respond forcefully,
using fiscal policy as the main line of defense and with
emphasis on measures that support China’s medium-term reform
objectives,” the IMF report said.
The IMF’s new language on the currency reflects a growing
international consensus that the Chinese yuan is
closing in on its fair value after about a decade at an
artificially weak level, potentially reducing it as a political
or international trade issue.
“The renminbi is assessed to be moderately undervalued,
reflecting a reassessment of the underlying current account,
slower international reserves accumulation, and past real
effective exchange rate appreciation,” the report said.
The IMF lowered its medium-term forecast for the current
account surplus to between 4 percent and 4.5 percent of GDP.
The IMF’s view is that the exchange rate still has a
“non-trivial” way to appreciate, Markus Rodlauer, the deputy
director of the IMF’s Asia-Pacific department, told reporters on
Wednesday. He did not give an exact value.
Last year’s report said the yuan was “substantially
undervalued” against the dollar by between 3 percent and 23
percent, depending on the methodology used.
Chinese contributors to the report rejected sharply the idea
that the yuan is not yet fairly valued.
“This assessment, in my authorities’ view, is not consistent
with the reality,” IMF executive director Tao Zhang said in the
Chinese authorities’ official response, included in the report.
“The sharp decline in the current account surplus and the
recent two-way movements in the renminbi suggest that the
currency is roughly in equilibrium.”
The new forecast for the current account surplus relative to
GDP is roughly consistent with what economists consider to be a
fairly-valued currency, as well as in line with levels that U.S.
Treasury Secretary Timothy Geithner has previously said would
help keep the global economy well-balanced.
China’s big trade and current account surpluses of past
years had fuelled trade tensions with other countries,
particularly the United States.
The IMF report warned of a number of risks to the economy,
specifically the question of whether banks or local governments
would bear the burden of non-performing loans — many stemming
from China’s 2008 stimulus package — if the economy were to
Other recommended reforms included better pricing signals
following on China’s moves to give banks more flexibility in
setting interest rates, more financial investment options to
avert another speculative leap into real estate, and tax changes
to support a shift from investment-led to consumer-led growth.
“The exchange rate issue is just one part of a package of
reforms needed to rebalance the economy,” Rodlauer said.
Without those reforms, “it will be very likely that the
current account surplus will go up again, not to where it was
before but more than it was now,” he added.
“Gradual appreciation will be necessary in upcoming years.”
The mid-point against which the Chinese yuan may trade was
set at 6.3429 against the dollar on Wednesday, its weakest point
since December 2011. The yuan has fluctuated against the dollar
this year, reversing many years of steady, one-way appreciation.
China doubled the permitted trading band for the yuan in
April, saying the currency could rise or fall 1 percent from the
The IMF, which last week cut its forecast for China’s 2012
growth to 8 percent from its April assessment of 8.25 percent,
reiterated that the biggest external risk the country faced was
a worsening of the euro zone debt crisis.
The IMF’s view is above government’s target of 7.5 percent
and in line with the consensus forecast in the latest Reuters
A reminder of risks to growth came from China’s industry
ministry which said in an unrelated statement on Wednesday that
downward pressure was still being felt by firms from customers
at home and abroad, despite signs that nine months of pro-growth
policy action from Beijing was gaining traction.
Beijing has followed a programme of policy “fine-tuning”
since the autumn of 2011, cutting interest rates, easing rules
on bank lending, fast-tracking fiscal spending and cutting taxes
and red tape for business.
“We can see relatively clear signs from the industry sector
that the economy is stabilising,” Zhu Hongren, the ministry’s
chief engineer told a scheduled news conference.
“But we still need to bear in mind that the foundation of
stability in the industry sector is fragile and the downward
pressure is still with us,” Zhu said.