IMF to China: Ease Exchange Rate Controls

February 15, CNN Money reported that:

International Monetary Fund chief urges China to loosen valuations of yuan against the dollar in effort to address global imbalances.

BEIJING (AP) -- The managing director of the International Monetary Fund said Friday he is urging Chinese leaders to ease exchange rate controls to address global financial imbalances and their own economic challenges.

Slower U.S. economic growth should affect China but the IMF still expects the economy to expand about 10% this year, said Dominique Strauss-Kahn. He met Thursday with Premier Wen Jiabao and other Chinese leaders.

"What I am working at is trying to explain to Chinese authorities... that it's in their own interests to have more flexible exchange rates," Strauss-Kahn said. He said that would "help to address both China's economic challenges and global imbalances."

Beijing's trading partners complain that China's currency, the yuan, is kept undervalued, giving an unfair price advantage to Chinese exporters and adding to the country's swollen trade surplus.

Strauss-Kahn declined to say whether the yuan exchange rate is misaligned but said it is moving in the right direction. Beijing revalued the yuan by about 2% against the U.S. dollar in July 2005 and has allowed it to rise by more than 13% since then. But the United States and others want faster action, and some American lawmakers are calling for punitive steps if Beijing fails to act.

The multibillion-dollar influx of export revenues also is causing Chinese domestic economic problems, straining the central bank's ability to contain pressure for prices to rise. The bank drains billions of dollars a month from the economy through bond sales and has piled up $1.53 trillion in foreign reserves.

Strauss-Kahn's 10% growth estimate was in line with an IMF forecast issued last month. China's economy expanded by 11.4% in 2007 but economists expect a slight slowdown this year due to lower U.S. demand for exports and Chinese government efforts to cool a boom in credit and investment. Forecasts for 2008 range from 9.5% to 11%.

Strauss-Kahn said he stressed to Chinese planners that a more flexible exchange rate could help achieve their goal of reducing reliance on exports by encouraging China's own consumers to spend more.

"More domestic demand growth will be what China needs, not export-driven growth," he said.

Also Friday, the IMF said it will sign an agreement with Beijing to cooperate in development efforts in low-income countries. China has been expanding such cooperation with the IMF and other international bodies as its economic and political profile rises on the world stage.

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[CNN Money]