IMF Reviewing Value of Yuan, While China & US Butt Heads Again

The International Monetary Fund will conduct a review to determine whether the Renminbi remains “substantially undervalued” in the global currency market, said an IMF spokesman last Friday, after a war of words emerged between the China and the US over the appropriate valuation of the Yuan during the recent World Economic Forum.

The International Monetary Fund will conduct a review to determine whether the Renminbi remains “substantially undervalued” in the global currency market, said an IMF spokesman last Friday, after a war of words emerged between the China and the US over the appropriate valuation of the Yuan during the recent World Economic Forum.

“Since our last assessment in the summer of 2011, the RMB has certainly appreciated,” noted IMF spokesman William Murray in an interview with the Wall Street Journal.

“However this information alone does not permit us to offer a new judgement on is valuation. We have more analysis to do,” he said.

According to IMF data, China’s exchange rate has been allowed to rise faster in the last year as compared to the past. The Yuan’s real effective exchange rate, based against a basket of currencies and accounting for inflation, went up by almost 20 percent in the last three months on an annual basis, and by over 8 percent throughout 2011.

But, the US remains unimpressed. Speaking to the World Economic Forum on Friday, US Treasury Secretary Timothy Geithner asserted that the Yuan was “still below almost all measures of fundamentals.”

“China does represent a really unique and formidable challenge to the global trading system,” said Geithner at Davos, as cited by AFP.

[quote]The Yuan still have “some way to go” before attaining a fair value, complained Geithner, and, “that’s why it’s very important that we get China to move on, comprehensively, on that front, not just on the exchange rate but on subsidies and distortions.”[/quote]

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Chinese authorities though have dismissed Geithner’s statements, claiming that, “people in the international community even don’t know the latest figures and their minds are filled with the old figures about China’s trade surplus.”

[quote]”Perceptions about the Renminbi exchange rate in the international community are absolutely groundless, as the Yuan is probably the only emerging economy’s currency that has been rising against the US dollar since August last year,” said Li Daokui, an adviser to the People’s Bank of China, during the sidelines of the World Economic Forum to Xinhua.[/quote]

“During the last few months of 2011, many Chinese private investors started to spend the Chinese currency buying US dollars, which is an indication that the currency is near an equilibrium level,” added Li, who expects China’s trade surplus to further decline in 2012, due to the stronger Chinese currency.

Eswar Prasad, a Cornell University economist and a former senior IMF China expert, also backed up Li’s claims, noting that the Yuan’s effective value, adjusted for inflation, had climbed by around 25 percent since 2007.

[quote]”All of the relevant indicators, the current account and trade surpluses, the pace of reserve accumulation and the exchange rate itself, have moved in the direction of suggesting the yuan is no longer much undervalued,” said Prasad.[/quote]

The IMF is said to be developing a new method for assessing global currencies, with it’s review of the Yuan expected to take a few months to complete. At the same time though, the review will take place just as the fund seeks more cash from China to help finance a $600 billion emergency cash pool. Thus far, Chinese officials have indicated that they would be willing to contribute between $50 billion to $100 billion to the fund, with the condition that China be granted free market economy status.