By Howard Schneider
Washington Post Staff Writer
Thursday, October 7, 2010; 11:44 PM
The head of the International Monetary Fund on Thursday said that China's currency is "substantially undervalued" and that he feared countries had begun viewing exchange rates "as a weapon" in the competition for economic growth.
"We have been one of the institutions to repeatedly say that we believe the renminbi was substantially undervalued and that something had to be done to fix this problem," IMF managing director Dominique Strauss-Kahn said in a news conference opening the agency's annual meeting. "Many do consider their currency as a weapon, and this is not for the good of the world economy."
His comments are part of an escalating tension over world exchange rates at a time when the surge of investment into emerging markets has forced up the value of local currencies - and threatened to make the exports of countries such as Brazil and Colombia more expensive.
China has fought that trend, keeping the value of its renminbi relatively stable - a policy that has stoked a political controversy in the United States and has now boiled over into talk of a global "currency war."
Strauss-Kahn said he did not think the issue would deteriorate that far, but he did say he was worried that the mood of global cooperation on economic matters appeared to be fraying.
Others went a step further: World Bank President Robert Zoellick noted that a wave of trade protectionism sparked the Great Depression in the 1930s and cautioned that policymakers needed to calm the current dispute before it gets out of hand.
"If one lets this slide into conflict or forms of protectionism, we then risk repeating the mistakes of the 1930s," Zoellick said.
Officially, China allows its currency to float within a limited range of value and says it intends to increase that range to allow the renminbi to appreciate over time. But Chinese officials also argue that countries like the United States have made too much of the issue, and contend that a rise in the value of the renminbi would do little, for example, to curb America's broad appetite for Chinese imports or trim its large trade deficit.
But Strauss-Kahn put the issue at the center of a broader effort to smooth out trade flows around the world, so that large exporting nations such as China rely more on their local consumers - and less on the United States - while debtor nations curb their borrowing.
That process is considered important to creating a healthier global economy, and Strauss-Kahn said it can't happen if countries don't allow their exchange rates to fluctuate based on market forces. The shift of capital and growth toward China and other fast-growing emerging markets means their currencies will naturally rise in value, and "to oppose this in the medium term won't help," Strauss-Kahn said.
The renminbi has risen only about 2 percent against the dollar in the past several months, after Beijing officials announced they would introduce a more flexible exchange rate. Some analysts say the renminbi would hit its true market value with a 25 percent or 40 percent increase.
Long an irritant in relations with the United States - China joined the World Trade Organization in 2000 and its aggressive currency management quickly emerged as a contradiction to its free market commitments - the issue is now becoming a test for the IMF.
U.S. Treasury Secretary Timothy F. Geithner urged the fund this week to become more active in resolving the issue and said it made little sense to allow emerging nations such as China a greater say in IMF affairs if they were not going to play by the same rules as other leading economic nations.