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Tuesday, Aug. 10, 2010

IMF barks at China over currency, account surplus


Special to The Japan Times

HONG KONG — The report by the International Monetary Fund on China published the week before last got less attention than it deserved, yet it is worth looking at what the IMF said.

One surprise was that the report was published at all. For the previous four years, IMF officials had done their economic reporting on China under regular Article IV consultations, but Beijing blocked publication. Exactly why the rulers in Beijing relented this time is open to cynical speculation.

A blogger for The Economist commented that poor countries fear the IMF and suppress its reports; middle- income countries quarrel with the fund but publish; and rich countries are powerful enough to publish but ignore IMF recommendations. On this basis, then, China has graduated.

The consensus of the economic pundits is that Beijing, having pre-empted the United States and the IMF by announcing that it was reverting to a more flexible currency, now feels confident that it can dominate the international debate.

The IMF staff report on China gives no figures on the extent to which the fund believes the renminbi is undervalued, since Beijing successfully argued for their deletion.

The report summarizes the giant strides China has made in its recent economic development, particularly in its swift and aggressive response to the global financial and economic crisis.

It also outlines challenges ahead:

• Withdrawing the fiscal stimulus while expanding support for consumption.

• Returning credit growth to more normal levels and creating a greater role for interest rates, open market operations and reserve requirements.

• Maintaining regulatory vigilance to manage the deterioration in credit after last year's expansion.

• Increasing information and transparency about local government financing and enforcing prohibition of local government debt guarantees.

• Introducing a property tax and raising capital costs to prevent real estate bubbles.

• Using exchange rate flexibility to allow the renminbi to appreciate in real terms.

• Liberalizing the financial system and phasing out deposit rate ceilings and direct limits on credit growth.

• Building a better safety net, especially in health, education and pensions.

• Using urbanization as a force for growth and rebalancing the economy, including reducing labor market rigidities, improving urban infrastructure, and sharpening competition in the service economy.

• Widening corporate ownership and increasing domestic competition.

One concern is the value of the renminbi, which the IMF says remains substantially below the level that is consistent with medium-term fundamentals. Later, the report claims that "the current undervaluation acts as a head wind to increasing private consumption."

China avers that the renminbi is 50 percent stronger than when the exchange rate was unified in 1994 and 22 percent higher than its 2005 lows.

Behind the disagreement on the currency is an argument about China's current account surplus. IMF staff believe that the recent sharp fall in the surplus will be reversed: Two separate computer models predict an 8 to 9 percent rise in two years. The IMF staff add that they "assume a more moderate increase in the current account" because of policies adopted this year and last.

China disagrees. It expects "that the current account surplus will settle at about 4 percent of GDP over the medium term," citing continuing fast growth, rising wages, structural reforms "and the recent appreciation of the currency."

The renminbi has hardly moved since Beijing's recent decision to adopt a more flexible policy.

Some powerful Chinese advocate depreciation — though not of the 25 to 40 percent level that American economists and politicians are clamoring for — if China's export juggernaut looks as if it may stall.

It is a surprise to find views contrary to those of the IMF staff intruding into the report. China's contrary arguments might have been more convincing if backed by argument and economics rather than assertions and rhetoric.

What should be of concern is that the debate has evidently become politicized. In the public notice accompanying the release of the IMF report, there was disagreement amid the fulsome praise of China's economic achievements.

After a string of statements like "Directors commended China's proactive and decisive policy," there came this jarring note: "Several Directors agreed that the exchange rate is undervalued. But a number of others disagreed with the staff's assessment of the level of the exchange rate, noting that it is based on uncertain forecasts of the current account surplus."

Given that few of the executive directors are economists capable of judging the merits of the respective arguments, this suggests political lobbying by Beijing.

This is a potentially dangerous trend especially when developing countries in general and Asians in particular are arguing for better representation in global financial bodies like the IMF.

An argument making the Washington rounds says it is "Asia's turn" to supply the next managing director of the IMF when Frenchman Dominique Strauss-Kahn departs.

The danger is that the lines between professional competence and political interference will be blurred.

It is of the utmost importance that the head of the IMF be the best person for the job, irrespective of nationality, and that the staff be professional financial bureaucrats and economists whose allegiance is to the IMF and global economy — not to their national governments.

The IMF is certainly not infallible: Its staff have made their share of mistakes, particularly in misjudging the social and political repercussions of their recommendations.

So, let a million arguments range over the economic wisdom and the social implications of IMF prescriptions, but keep the politics out.

It's bad enough that the U.S. Treasury has tried to strong-arm the IMF without China now trying to capture it.

Kevin Rafferty is editor in chief of Plain Words Media, a group of journalists specializing in economic development issues.


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