The International Monetary Fund has declared that China’s currency is “no longer undervalued”, marking a significant shift after more than a decade of criticism of Beijing’s tight management of the renminbi.
The move amounts to a big vote of confidence in Beijing and the renminbi at a critical time. It also puts the IMF at odds with its biggest shareholder, the US, which insists that China continues to draw an unfair trade advantage from a renminbi that it considers “significantly undervalued”.
The renminbi has gained 25 per cent against the US dollar since it was allowed to adjust upwards within a narrow band a decade ago, and has held its value even as the dollar has strengthened against other major currencies over the past year.
But many economists — and, until yesterday, the IMF fell into that camp — have long considered the renminbi to be undervalued. They have pointed to Beijing’s historical tight control of the currency’s value as a big factor in the rise of its export-oriented economy to a point where it is now the world’s leading trading nation.
Speaking in Beijing at the end of a regular review of China’s economy, David Lipton, the IMF’s first deputy managing director, said: “While undervaluation of the renminbi was a major factor causing large imbalances in the past, our assessment is that the substantial real effective appreciation over the past year has brought the exchange rate to a level that is no longer undervalued.”
In Washington a senior US official said that while the US welcomed the recent appreciation in China’s currency it remained of the view that the renminbi was “significantly undervalued” with China’s trade surplus with the US and other nations strong evidence of that.
Eswar Prasad, the former head of the IMF’s China unit, said the shift by the fund wasimport ant as it marked the first time since the late 1990s Asian financial crisis that the fund had not deemed the renminbi to be undervalued. It also presaged the likely adoption later this year of the renminbi as one of the small number of major currencies in a basket used to determine the value of the IMF’s de-facto currency, the Special Drawing Rights.
China has publicly expressed its desire for the renminbi to join the dollar, yen, euro and pound sterling in the SDR basket — a move that would see it recognised as an official reserve currency.
“We welcome and share this objective and will work closely with the Chinese authorities in this regard,” Mr Lipton said yesterday, noting the IMF’s stated position on the renminbi’s inclusion in the SDR “is not a matter of ‘if’ but when”.
The IMF is conducting a review of the SDR facility and its constituent currencies that is due to be completed later this year. To be included, the renminbi must be deemed to be “freely usable”.
The move amounts to a big vote of confidence in Beijing and the renminbi at a critical time. It also puts the IMF at odds with its biggest shareholder, the US, which insists that China continues to draw an unfair trade advantage from a renminbi that it considers “significantly undervalued”.
The renminbi has gained 25 per cent against the US dollar since it was allowed to adjust upwards within a narrow band a decade ago, and has held its value even as the dollar has strengthened against other major currencies over the past year.
But many economists — and, until yesterday, the IMF fell into that camp — have long considered the renminbi to be undervalued. They have pointed to Beijing’s historical tight control of the currency’s value as a big factor in the rise of its export-oriented economy to a point where it is now the world’s leading trading nation.
Speaking in Beijing at the end of a regular review of China’s economy, David Lipton, the IMF’s first deputy managing director, said: “While undervaluation of the renminbi was a major factor causing large imbalances in the past, our assessment is that the substantial real effective appreciation over the past year has brought the exchange rate to a level that is no longer undervalued.”
In Washington a senior US official said that while the US welcomed the recent appreciation in China’s currency it remained of the view that the renminbi was “significantly undervalued” with China’s trade surplus with the US and other nations strong evidence of that.
Eswar Prasad, the former head of the IMF’s China unit, said the shift by the fund was
China has publicly expressed its desire for the renminbi to join the dollar, yen, euro and pound sterling in the SDR basket — a move that would see it recognised as an official reserve currency.
“We welcome and share this objective and will work closely with the Chinese authorities in this regard,” Mr Lipton said yesterday, noting the IMF’s stated position on the renminbi’s inclusion in the SDR “is not a matter of ‘if’ but when”.
The IMF is conducting a review of the SDR facility and its constituent currencies that is due to be completed later this year. To be included, the renminbi must be deemed to be “freely usable”.