The new era for the Chinese yuan.

The new era for the Chinese yuan.

“For more than a decade, China’s taken a verbal beating from other countries for keeping its currency unfairly cheap. Those days might finally be over. The yuan (a.k.a. the renminbi) is no longer undervalued, the International Monetary Fund’s Markus Rodlauer said earlier today, while also urging Chinese leaders to allow the currency to trade more freely.”

“On the external side, China has made good progress in recent years in reducing the very large current account surplus and accumulation of foreign exchange reserves. Nevertheless, staff projections for 2015 suggest that China’s external position is still moderately stronger than consistent with medium-term fundamentals and desirable policies. There are several factors influencing a country’s external position, with the exchange rate being one of them. While undervaluation of the Renminbi was a major factor causing the large imbalances in the past, our assessment now is that the substantial real effective appreciation over the past year has brought the exchange rate to a level that is no longer undervalued. However, the still-too-strong external position highlights the need for other policy reforms—which are indeed part of the authorities’ agenda—to reduce excess savings and achieve sustained external balance. This will also require that, going forward, the exchange rate adjusts with changes in fundamentals and, for example, appreciates in line with faster productivity growth in China (relative to its trading partners). On the exchange rate system, we urge the authorities to make rapid progress toward greater exchange rate flexibility, a key requirement for a large economy like China’s that strives for market-based pricing and is integrating rapidly in global financial markets. Greater flexibility, with intervention limited to avoiding disorderly market conditions or excessive volatility, will also be key to prevent the exchange rate from moving away from equilibrium in the future. We believe that China should aim to achieve an effectively floating exchange rate within 2–3 years.

http://www.imf.org/external/np/sec/pr/2015/pr15237.htm

 

 

 

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