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IMF calls for greater yuan flexibility

IMF officials want Beijing to make China's exchange rate more flexible, although they differ on how quickly this should be done.

In an economic snapshot of China, the IMF said that "many directors supported a gradual, cautious approach to further increasing exchange-rate flexibility ... to allow time for the economy to adjust."

"However, a number of other directors recommended that the authorities allow the exchange rate to move more quickly toward a level that better reflects underlying market forces," the written assessment said.

The assessment is part of ongoing evaluations of countries conducted by the 184-nation IMF, which seeks to keep a pulse on the world economy.

China announced in late July that it was allowing its currency to rise slightly against the US dollar.

In Monday's assessment, IMF officials also said that "protectionist sentiments" have increased in recent months from some of China's trading partners as Chinese-made clothing and textiles shipments abroad has surged.

In response, the US has imposed limits on certain Chinese apparel and textiles that can flow into this country.

On other matters, IMF officials projected China's economic would grow by a blistering 9 percent this year, down slightly from 9.5 percent growth logged in both 2003 and last year.

Rapid growth, however, brings its own challenges. The IMF has long been concerned that China is at risk of overheating from excess investment, which could trigger rampant inflation and undo some of the progress of recent years.

The IMF forecast consumer prices would moderate to an average increase of 3.0 percent this year from 3.9 percent last.

"The overall economy looks very strong. But there's a few potential risks there, the key one being with regard to investment," the IMF's mission chief for China, Steven Dunaway, told reporters.

"The government was quite successful in slowing down the rate of investment last year, but there's still a lot of liquidity in the banking system ... which could spur another spurt in lending," he said.

The IMF has warned that massive investment is being directed willy-nilly in China, with the property market for instance booming while more needs to be spent on electricity and transport networks to sustain growth.

China needs to implement more structural reform, particularly in the financial sector, government finances and the labor market, to underpin its solid prospects, the IMF report said.

While "generally favorable," China's medium-term prospects could be undermined by high oil prices, a "disorderly resolution" of global imbalances and foreign trade restrictions against its rocketing exports, the report said.

The IMF report called also for the central bank to be given "more discretion" over setting interest rates to promote economic stability.

At present, all decisions on rates by the People's Bank of China (PBC) have to be approved by the country's Cabinet, the State Council.

"At least as an interim step, there may be a range of movement in interest rates that could be done at the discretion of the PBC without going to the State Council," Dunaway said.
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