IMF set stage for China cur­rency shift

The Pak Banker - - FRONT PAGE -

The In­ter­na­tional Mon­e­tary Fund set the stage for Bei­jing's dra­matic cur­rency pol­icy shift this week by warn­ing Chi­nese author­i­ties in May that it was be­com­ing "in­creas­ingly crit­i­cal" for Bei­jing to al­low its cur­rency to trade more freely, ac­cord­ing to an IMF re­port.

The warn­ing pre­saged this week's move by the Peo­ple's Bank of China to al­low a greater role for mar­kets in set­ting the ex­change rate of the ren­minbi and what turned out to be the two big­gest daily de­pre­ci­a­tions of the cur­rency in more than 20 years.

In what the IMF has called a "welcome step", the PBOC this week caught mar­kets by sur­prise when it abruptly al­tered the way it sets the daily mid­point for the nar­row band in which China has al­lowed the cur­rency to trade against the US dol­lar since 2005.

The IMF has for years called for China to al­low a greater role for the mar­kets in all of its eco­nomic poli­cies. But in their an­nual as­sess­ment of China's econ­omy re­leased on Fri­day, the IMF's staff wrote that dur­ing dis­cus­sions with Chi­nese author­i­ties in May they had stressed that it was be­com­ing in­creas­ingly ur­gent for Bei­jing to act on the ex­change rate, which is now al­lowed to move only in a 2 per cent band around the daily mid­point.

"More flex­i­bil­ity is be­com­ing in­creas­ingly crit­i­cal to move to an ef­fec­tively float­ing ex­change rate," the IMF econ­o­mists wrote in a sum­mary of their dis­cus­sions with Chi­nese author­i­ties pre­sented to the board last month but only re­leased pub­licly on Fri­day.

Be­cause of size­able and grow­ing cap­i­tal flows, the IMF said China's mon­e­tary pol­icy risked be­com­ing less ef­fec­tive, they said. The "im­pos­si­ble trin­ity" of a closed cap­i­tal ac­count, in­de­pen­dent mon­e­tary pol­icy and a tightly man­aged ex­change rate was set to "be­come in­creas­ingly bind­ing", IMF staff wrote.

China needs to move to some­thing akin to a float­ing ex­change rate within two to three years, they said. But "steps over the next few months could in­clude a fur­ther widen­ing of the band and changes to how the cen­tral par­ity is set", the IMF econ­o­mists wrote. The lat­ter is what the PBOC opted to an­nounce on Tues­day.

Markus Rod­lauer, the IMF's mis­sion chief for China, de­clined to re­veal the de­tails of the fund's dis­cus­sions re­gard­ing the ex­change rate with Chi­nese author­i­ties in May. But he said there had been a "meet­ing of the minds" on the need for mar­kets to play a greater role in set­ting the value of the ren­minbi.

This week's step and the sub­se­quent falls in the value of China's cur­rency had not al­tered the IMF's view an­nounced at the close of the mis­sion in May that the ren­minbi was "no longer un­der­val­ued", said Mr Rod­lauer, although he de­clined to call it "fairly val­ued". Since 2005 the ren­minbi has ap­pre­ci­ated more than 30 per cent against the US dol­lar, ac­cord­ing to the IMF, while this week's falls amounted to less than 3 per cent.

But they had marked a sig­nif­i­cant step to­wards a freer ex­change rate, he said. Un­der the new rules the PBOC's daily mid­point, around which the 2 per cent trad­ing band is set, will be linked to the pre­vi­ous day's clos­ing value. The­o­ret­i­cally that means the ren­minbi could trade up or down as much as 10 per cent in any given week, Mr Rod­lauer said.

"That does bring us quite close to a float," he said. More­over, he said he ex­pected the band to widen in the com­ing years as China con­tin­ues to move to­wards a freely float­ing ex­change rate.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.