* IMF softens language on yuan, says “moderately
* Sees risks if investment slows, bad loans rise
* Yuan recedes as political issue as fair value nears
By Lucy Hornby
BEIJING, July 25 (Reuters) – The International Monetary Fund
said the Chinese yuan was only “moderately undervalued” against
a basket of currencies in an annual assessment released on
Wednesday, suggesting a lessening of international pressure on
Beijing over its foreign exchange and trade policies.
The IMF’s new stance on the yuan’s value – it had previously
called it “substantially undervalued” against the dollar – comes
as the currency approaches what many regard as fair value, and
as the issue recedes as a point of diplomatic friction between
the West and China.
The report said economic reforms so far had substantially
reduced external imbalances, but at the cost of significant
domestic imbalances fueled by China’s investment-driven growth
model. It warned of risks to growth if investment were to slow
sharply or if there were a sudden rise in non-performing loans.
The new language on the currency reflects a growing
international consensus that the yuan is closing in
on its fair value after about a decade at an artificially weak
level, potentially reducing it as a political and international
“Now, with the IMF saying it is OK, the legitimacy of the
accusation (that China distorts the value of its currency) has
been lost,” said Tu Xinquan, associate director of the China
Institute of WTO Studies at the University of International
Business and Economics in Beijing.
“Some U.S. politicians will still talk about this issue
because the bilateral trade deficit is still there. But I think
the U.S. government will not focus on this issue.”
Nonetheless, 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.
The IMF also lowered its medium-term forecast for the
current account surplus to between 4 percent and 4.5 percent of
GDP. That level is roughly consistent with what economists
consider to be a fairly-valued currency, and in line with levels
that U.S. Treasury Secretary Timothy Geithner has previously
said would help keep the global economy well-balanced.
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.”
China’s big trade and current account surpluses of past
years had fuelled trade tensions with other countries,
particularly the United States.
The U.S. Treasury has refrained from labelling China a
“currency manipulator” to avoid antagonising the emerging giant
and possibly stalling further reforms.
“I feel the pressure from the U.S. is certainly not as big
as a few years ago, even though it’s an election year,” said
Zhiwei Zhang, China chief economist at Nomura.
He added that Beijing had moved faster than the market
expected recently in allowing more flexible trading.
“All this shows the currency is near equilibrium.”
While Congress threatened punitive action if the yuan did
not move, multinational businesses operating in China complained
that restrictive industrial policies caused them more problems
but lacked the same punch as a political slogan.
“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 IMF report warned of a number of risks to China’s
economy, specifically the question of whether banks or local
governments would bear the burden of non-performing loans – many
stemming from China’s massive 2008 stimulus package – if the
economy were to slow sharply.
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 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, and fell to a fresh 10-month low in spot
The yuan has fluctuated against the dollar this year,
reversing many years of one-way appreciation.
Traders interpreted Wednesday’s move as a signal from
Beijing that it was prepared to accept further depreciation to
help exporters cope with the global economic slowdown. The yuan
has now fallen 1.5 percent against the dollar so far this year,
while gaining 0.6 percent against the euro.
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 the government’s target of 7.5
percent and in line with the consensus forecast in the latest