IMF questions US claims about revaluing the yuan

The IMF said on Tuesday there is no clear evidence that China's yuan is substantially undervalued, countering claims by US exporters that the currency has been kept artificially low to give Chinese exports an advantage.

US officials have been pressing China, the world's sixth-largest economy, to loosen its yuan peg to the dollar that would ease the trade distortion with the US that lies heavily in favor of China.

But in a review of the Chinese economy, the IMF said a currency revaluation would not by itself have a major impact on global current account imbalances, particularly given China's relatively small share in world trade.

It said more flexibility of the yuan would be in China's own interest. It would allow China more room to pursue an independent monetary policy, help cushion the economy against external shocks and help with adjustments to the structure of the economy, the fund added.

"Directors considered that China could, in a phased manner, introduce more flexibility to its exchange rate without causing major disruptions to its economy," the IMF said.

The timing of such a move should, however, be left to Beijing and its assessment of the market, said Steven Dunaway, senior advisor in the IMF's Asia-Pacific Department.

"We're not advocating a floating of the currency. What we're talking about is some increased movement in the exchange rate," Dunaway said on a conference call.

Such movement could take place by widening the band in which the yuan trades, or changing the peg from a single currency to a basket of different currencies, he said.

The fund said loosening the grip of the yuan peg to the dollar should be carefully planned and sequenced with key changes in the economy.

It said some members of its executive board felt China should take advantage of its strong external position, particularly the current account surplus, to begin initial steps toward greater exchange rate flexibility.

Dunaway said a small first adjustment in the yuan might cause the currency to rise initially before investors began to speculate on the next move. A more significant move should be accompanied by a firm government statement of its intentions, he added.

In the review, the IMF said China should beware of imbalances in its economy as the country rapidly becomes a global manufacturing hub showered with money and credit growth.

"Continued strong credit growth could affect overall quality of the loan portfolio of state banks, adding to the non-performing loan problems these institutions already face," the IMF said.

Some economists have warned that a more flexible yuan could hurt China's fragile financial sector, burdened with bad loans, but Dunaway said as long as capital controls were in place, there would be no major risk to the banking sector.

The Washington-based lender said that, overall, the Chinese economy had rebounded from the SARS epidemic earlier this year and picked up in the second half. Growth was now projected to hit 8.5 percent this year.

Next year, China's economic activity should remain strong and the IMF forecast the economy would grow at about 8 percent.