Chinese currency 'moderately' undervalued

The International Monetary Fund softened its stance on the yuan by describing the Chinese currency as only “moderately” rather than “substantially” undervalued. “China has made significant progress in reducing external imbalances,” David Lipton, the IMF's first deputy managing director, said in Beijing on Sunday, citing a decline in the current-account surplus to less than three per cent of gross domestic product last year from 10 per cent in 2007. “We now assess the renminbi to be moderately undervalued against a broad basket of currencies.” The assessment comes even after the currency’s gains against the dollar ground to a halt as the Chinese economy slows and Europe's sovereign-debt crisis threatens the nation’s exports. While the Chinese central bank this year widened the trading band for the yuan, the currency is down about one per cent against the dollar and was described by the US Treasury Department last month as “significantly undervalued”.The yuan closed at 6.3705 per dollar in Shanghai yesterday, according to the China Foreign Exchange Trade System. The currency has gained about 30 per cent against the dollar since a peg to the greenback was scrapped in July 2005. “As China continues its reform to support consumer-based demand and rebalances its economy, the renminbi will strengthen,” Lipton said. “We hope China will actively move in that direction.” The US last month urged China to strengthen the yuan, while declining to brand the nation a currency manipulator. Presidential candidate Mitt Romney has said that, if elected, he will make such a designation on his first day in office. In a semi-annual report to Congress on exchange-rate policies, the US Treasury said that it will continue to “closely monitor” the pace of yuan appreciation and push for “policy changes that yield greater exchange-rate flexibility”. The Obama administration says China’s policies give an unfair trading advantage to the nation that is the world’s biggest exporter. In contrast, Premier Wen Jiabao said on March 14 that the yuan’s exchange rate may be near an “equilibrium”. Lipton welcomed China's interest-rate cut this week and the central bank's move to give lenders more freedom in setting deposit and lending rates. The People's Bank of China lowered the key lending and deposit rates by 25 basis points in the first reduction since 2008. “Intensifying strains in Europe” could make it harder for China to achieve eight per cent growth this year, the IMF official said. “It is possible that the slowdown in Europe will be more pronounced,” he said, adding that China can employ fiscal stimulus to bolster growth if necessary. Lipton met Chinese Vice Premier Wang Qishan yesterday and central bank governor Zhou Xiaochuan June 7. Zhou and Lipton exchanged views on the global financial situation, the euro debt crisis and IMF reform, according to a statement posted on the Chinese central bank's website June 7.from gulf news.