IMF warns China not to delay flexible currency policy
Thursday, October 21, 2004 2:17:38 AM
afxpress.com
WASHINGTON (AFX) - The International Monetary Fund warned China that the cost of maintaining its fixed currency regime Is mounting and argued for a widening of the trading band on the yuan by 10 to 15 pct to stave off pressures on its economy
"I think the cost of maintaining the exchange rate regime is going to be large and will grow over time -- which is why I think there is an argument for a quick move," IMF's China division chief Eswar Prasad said
The yuan, which is fixed to the US dollar, is currently considered undervalued and the US, Japan, and the European Union have been hurting from the weight of cheap Chinese exports
The IMF has been prodding China for some time to swiftly adopt a flexible currency regime -- like widening the band in which it allows the currency to trade against the dollar -- but Beijing says the time is not yet ripe
Prasad, answering questions from experts at a conference in Washington on East Asian exchange rate issues, said it was more feasible for China to adopt flexibility in managing the yuan than launching a radical revaluation of the currency
The yuan, also known as the renminbi and now pegged at 8.27 to the US dollar, is currently in a narrow band to the dollar enforced by the Peoples Bank of China
But Prasad indicated that China has to pay the price for not heeding IMF advice to it about a year and half ago to widen the band by some 3-5 pct
"I think under present circumstances that could be disastrous because the market might see that as clearly inappropriate and just as a first step. But I think the price of having waited this long -- the initial move is going to have to be much larger," he said
Because of greater pressures to its economy, if China wanted to widen the band, it should do so by 10 to 15 pct, he said
US President George W. Bush has been talking up the currency issue ahead of the Nov 2 election, charging that the yuan rate had kept China's exports artificially cheap, undermining US exports and stealing US jobs. Bush telephoned Chinese President Hu Jintao this month to underline his concerns and Hu vowed to "move forward firmly and steadily to a market-based, flexible exchange rate," according to the White House
China's top finance and central bank officials were invited for the first time to attend this month's meeting of finance chiefs from the Group of Seven industrial powers at the sidelines of the IMF/World Bank annual meeting in Washington. G7 members again pressed for a freer yuan regime but the Chinese officials again offered no timetable, saying they would act "when conditions permit." A free-floating Chinese yuan, according to some analysts, could boost US exports and thereby help reduce the massive US current account deficit, which has contributed to imbalances in the global economy
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