UPDATE 2-China, prior to rate hike, leery of yuan move-IMF
Fri Nov 5, 2004 05:51 PM ET
(Recasts, adds details from report)
By Lesley Wroughton
WASHINGTON, Nov 5 (Reuters) - China has "strong reservations" about moving to unlink its currency from the dollar, the International Monetary Fund revealed in documents on its discussions with Beijing, published on Friday for the first time.
The Washington-based IMF has never before released a staff report on its economic consultations with China. Release of such documents is generally decided by member governments and suggests more transparency in Beijing.
In the documents, written in July, IMF said China recognized it would eventually need to shift from a fixed currency regime, but was concerned that a small initial move could spur capital inflows at a time when authorities are trying to cool money and credit growth.
According to the documents, published on the IMF Web site www.imf.org, fund officials "suggested that, if sizable speculative capital inflows were to continue, a larger initial move would be necessary."
Beijing was also worried that a large change in the value of the currency might hurt domestic employment, the fund said.
During talks in China in May, the IMF said authorities noted that the economy had to generate 20 million to 25 million new jobs a year to accommodate rural migrants moving to the cities and new entrants in the work force.
But the IMF, whose role is to oversee global economic stability, said more exchange rate flexibility was in China's best interest by enhancing the country's ability to develop an independent monetary policy and adjust to economic shocks.
The move could best be done by widening the exchange rate band, possibly accompanied by a move to a currency basket, the IMF suggested.
There was evidence that speculative pressures on the currency may have diminished in 2004, the fund noted.
The Washington-based IMF has never before released a staff report on its economic discussions with China, a move decided by member governments.
Most other IMF member countries publish documents on their consultations with the fund, which give markets access to data about a country's economic performance.
China's currency is pegged at around 8.28 to the dollar. The fixed rate has been a politically contentious policy for the Bush administration.
The IMF staff papers also revealed that the IMF had been pressing China to tighten monetary policy to ensure that growth in monetary and credit aggregates slowed.
At the time of the report in July, the IMF warned that policy measures taken by China to take the heat out of its economy may not be enough to ensure a soft economic landing. It said fiscal policy should play a bigger role in achieving that goal.
China's economy has slowed for several consecutive quarters, but grew at a still-robust 9.1 percent through the third quarter.
In late October, China raised interest rates for the first time in nine years, a move seen as a market-oriented response by Beijing to managing the economy. But it was not necessarily a step toward a more flexible exchange policy.
The IMF said China agreed with its assessment that money and credit growth needed to be reduced, but authorities did not "want to overdo the tightening in policies and run the risk of precipitating a hard landing."
"They felt that it would be prudent to first give the (policy) measures taken so far a chance to work and see what impact they would have," the IMF said.
The fund said the financial condition of China's banking sector remained weak, despite efforts to strengthen it.
Diversifying ownership in the banks, including allowing qualified foreign financial institutions to take ownership stakes, would help the restructuring of the sector, it added.
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