IMF lauds China on yuan’s link to market
Gradual transition to free float
THE INTERNATIONAL Monetary Fund (IMF) said China’s move to link the yuan’s value to market forces was an encouraging step toward what may become a freely floated currency within the next few years.
The changes by China would help it gradually transitioning “from a tightly managed system linked to the US dollar to one that is more open and more flexible and more responsive to market conditions”, Markus Rodlauer, the IMF’s mission chief to China, said on Friday. The currency ought to move to “free float” within two to three years, he said.
Rodlauer reiterated the IMF’s assessment that the yuan was no longer undervalued, even after the currency dropped nearly 3 percent last week.
The yuan depreciated 2.9 percent last week after the People’s Bank of China announced its move on August 11 toward a more market-determined rate.
The IMF said later the same day the move “appears a welcome step as it should allow market forces to have a greater role in determining the exchange rate”.
The Chinese government should put in place an “effectively” floating rate for the yuan before fully liberalising its capital markets, the Washingtonbased fund said.
Decisive role
Moving to a free float was “necessary for allowing the market to play a more decisive role in the economy, rebalancing toward consumption, and maintaining an independent monetary policy as the capital account opens,” the IMF said in the report dated July 7, which was written before China devalued the yuan last week.
The fund is reviewing a bid by China to have the yuan included in the basket of currencies that make up the IMF’s Special Drawing Rights, which countries can count as a reserve asset.
Approval would boost China’s efforts to have the yuan considered a reserve currency, alongside the dollar, euro, yen and British pound.
IMF staff also recommended curtailing interventions, measures such as China took recently to stem a rout in the nation’s stock market.
Chinese policymakers went to unprecedented lengths to put a floor under the market as the Shanghai Composite index slumped more than 30 percent in four weeks to July 8.
The “heavy intervention created risks exacerbating ‘moral hazard’,” fostering a perception the government would not let prices fall below a certain level, IMF staff said in the report on Friday.
“This set of interventions needs to be curtailed to permit a return to normal price discovery,” the report stated.
Banned
In an effort to bolster consumer confidence and prevent soured loans backed by equities from infecting the financial system, China banned large shareholders from selling stakes, ordered state-run institutions to buy shares and let more than half of the companies on mainland exchanges halt trading.
The IMF said China was moving into a phase of “slower, yet safer and more sustainable” growth.