China allows IMF to share results of economic report

bar shows China's current account balance as a percentage of GDP
By Howard Schneider
Washington Post Staff Writer
Friday, July 30, 2010

The International Monetary Fund on Thursday released its first detailed assessment of the Chinese economy in four years, a document less interesting in its details than for the fact that it was made public at all.

There were the expected broad conclusions -- that the country's currency is undervalued, growth is vigorous, property values may be rising too fast -- and some new insights. The Chinese were, it turns out, spooked by the recent crisis in Europe and are concerned that the developed world is drowning in debt, and as a result they have become even more cautious than usual in their own policies.

But this is the first IMF evaluation of the country to be released in four years, a breakthrough of sorts not just for the IMF but also for the Obama administration's efforts to make China a more active player in the Group of 20.

Such assessments of China have been performed, as they are for other countries, on an annual basis. But since 2006, Chinese officials had not authorized their release -- a rarely exercised prerogative that reflected disagreement between Beijing and the IMF over the staff's portrayal of China's currency and other policies.

Recent years have been turbulent for China, as they have been for the wider global economy. The recession led to a collapse in China's exports as global demand softened. China responded quickly by opening the purses of its central government and its banks with a dramatic spike in lending. While the IMF says there are more than a few questions about the quality of the loans and the standing of the banks, China is now approaching double-digit growth again and is helping Asia lead the global economic recovery.

The IMF and the United States, meanwhile, have opened discussions on giving China more of a formal voice in the fund's affairs, and more notably have tempered criticism of the country's currency policy.

China announced a month ago that it was dropping its peg to the dollar and would again allow its currency, the yuan, to float, albeit in a controlled way. The currency has appreciated less than 1 percent since then.

The IMF assessment concluded that the yuan, also known as the renminbi, was "substantially" undervalued and that China needs to lets its currency appreciate if the country is to become less dependent on exports and encourage more local spending. A rising currency makes foreign goods cheaper while raising the price of the products the country sends abroad.

But the evaluation avoided specifics. According to reports in the Wall Street Journal and elsewhere, the IMF staff deleted a footnote estimating the undervaluation at as much as 25 percent. IMF China mission chief Nigel Chalk said that as a rule, he "doesn't like" precise estimates when they involve an economy changing as quickly as China's.

"Any of these quantitative estimates don't do a good job and are not reliable," Chalk said in a conference call Thursday. But he noted that China has accumulated $2.5 trillion in foreign currency reserves -- a stockpile expected to hit $3 trillion next year -- and that this is not consistent with a properly valued yuan or a well-balanced economy.

The IMF projects that China's current account surplus -- the overall inflow of money from around the world, driven by the country's export juggernaut -- is rising now that the recovery is underway and will soon approach the same level as in 2007, when it topped 10 percent of gross domestic product.

Chinese officials say they are taking measures that amount to a "structural break" with the past that will reduce the current account surplus to about 4 percent of GDP.

They also say the currency will appreciate but stress that changes in their domestic economy -- the buildup of social safety nets, wage increases, urbanization, and other steps -- will foster a society that spends more, regardless of how the yuan relates to the dollar.

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