Last updated: July 25, 2012 10:42 am

IMF says renminbi ‘moderately undervalued’

The International Monetary Fund has softened its stance on the Chinese renminbi, calling the currency “moderately undervalued” against a basket of currencies, an important change in wording that will make it easier for Beijing to rebuff foreign criticism of its exchange rate regime.

The IMF previously described the Chinese exchange rate as “substantially undervalued”, but in a report released on Wednesday said the country’s shrinking trade surplus and the renminbi’s appreciation in recent years meant that it was now closer to fair value.

The change in assessment comes after the IMF conducted an annual review of the Chinese economy last month.

Wednesday’s detailed report said economic reforms so far had substantially reduced external imbalances, but at the cost of significant domestic imbalances fuelled by China’s investment-driven growth model. It warned of risks to growth if investment were to slow sharply or if there were a sudden rise in non-performing loans.

The IMF, which last week cut its forecast for China’s 2012 growth to 8 per cent from its April assessment of 8.25 per cent, reiterated that the biggest external risk the country faced was a worsening of the eurozone debt crisis. Chinese growth edged down to 7.6 per cent in the second quarter this year from 8.1 per cent in the first quarter.

The more favourable assessment of the renminbi is strikingly at odds with rhetoric on the presidential campaign trail in the US, where both contenders for the White House have vowed to fight what they view as China’s unfair trade advantage.

Mitt Romney, the Republican candidate, has said that he would brand Beijing a “currency manipulator” on his first day in office, while President Barack Obama has drawn attention to the trade cases that his administration has brought against China.

The IMF noted that China’s current account surplus had fallen from 10 per cent of gross domestic product in 2007 to less than 3 per cent last year, while the renminbi has risen nearly a third against the currencies of its biggest trading partners since 2005.

Despite the IMF’s softer wording, Beijing still bristled at the conclusion that its exchange rate remained undervalued.

“This assessment, in my authorities’ view, is not consistent with the reality,” Zhang Tao, China’s representative to the IMF, wrote in a response to the report. “The recent two-way movements in the renminbi suggest that the currency is roughly in equilibrium.”

As if to underline that point, the Chinese central bank on Wednesday guided the currency towards its weakest level against the dollar since late last year. With the dollar near a two-year peak in global markets, the renminbi has continued to appreciate against other currencies even while weakening against the dollar.

The Chinese central bank widened the renminbi’s daily trading band against the dollar in April, a step towards giving market forces more sway over the currency’s value.

The IMF noted that the central bank’s intervention in the foreign exchange market had been “sharply reduced” since that decision. “If sustained, such restraint would mark welcome progress toward a more market-based exchange rate system,” it said.

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